Fiscal inertia, donor credibility, and the monetary management of aid surges |
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Authors: | Edward F Buffie Stephen A O'Connell |
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Institution: | a Department of Economics, Indiana University, Bloomington, IN, 47401, United States b Swarthmore College, Swarthmore, PA, United States c University of Oxford, Oxford, England |
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Abstract: | Donors cannot pre-commit to support scaled-up public spending programs on a continuing basis, nor can governments credibly commit to curtail expenditure rapidly in the event that aid revenues contract. An aid boom may therefore be accompanied by a credibility problem. When this is the case, the absorb-and-spend strategy recommended by the IMF leads to capital flight, higher inflation, and large current account surpluses inclusive of aid. The right policy package combines a critical minimum degree of fiscal restraint with reverse sterilization. |
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Keywords: | E31 E63 F41 |
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