Optimal Fiscal Spending and Reserve Accumulation Policies Under Volatile Aid
This paper assesses the optimal setting of fiscal spending and foreign exchange rate intervention policies in response to volatile foreign aid,
Abstract
This paper assesses the optimal setting of fiscal spending and foreign exchange rate intervention policies in response to volatile foreign aid, in a small open economy model that incorporates typical features of low-income countries. Within a class of policy rules, it jointly considers the optimal aid spending and international reserve accumulation policies. The results show that it is optimal to adjust government spending gradually in response to unpredictable fluctuations in aid, while partially accumulating foreign exchange reserves to offset Dutch disease effects. Also, allocating relatively more of the government spending to productive public investment, and less to government consumption, is welfare improving.
This work is part of the ‘Macroeconomics in Low-income countries’ programme
Citation
Ioana R. Moldovan, Shu-Chun Susan Yang, and Luis-Felipe Zanna. Optimal Fiscal Spending and Reserve Accumulation Policies Under Volatile Aid. IMF Working Paper No. 19/126
Link
Optimal Fiscal Spending and Reserve Accumulation Policies Under Volatile Aid