Aid, Growth, and Real Exchange Rate Dynamics

Devarajan, Go, Page, Robinson, and Thierfelder argued that if aid is about the future and recipients are able to plan consumption and investment decisions optimally over time, then the potential problem of an aid-induced appreciation of the real ex...

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Bibliographic Details
Main Authors:	Devarajan, Shantayanan, Go, Delfin S., Page, John, Robinson, Sherman, Thierfelder, Karen
Format:	Policy Research Working Paper
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	ABSORPTIVE CAPACITY ADJUSTMENT COST ADJUSTMENT COST FUNCTION ADJUSTMENT COSTS AGGREGATE CONSUMPTION AGGREGATE DEMAND AGGREGATE SUPPLY BALANCE OF PAYMENTS BALANCE OF TRADE BASE YEAR BEHAVIOR OF INVESTMENT BID BUDGET CONSTRAINT CAPITAL ACCUMULATION CAPITAL FORMATION CAPITAL GOODS CAPITAL GOODS IMPORT CAPITAL INFLOW CAPITAL INFLOWS CAPITAL STOCK COMMERCIAL LOAN COMMERCIAL LOANS COMMODITY PRICES COMPETITIVENESS CONSUMER PREFERENCES CONSUMERS CONSUMPTION DECLINES CONSUMPTION EXPENDITURES CONSUMPTION SMOOTHING CORPORATE INVESTMENT COST OF INVESTMENT CURRENCY CURRENT ACCOUNT CURRENT ACCOUNT BALANCE DEBT DEBT ACCUMULATION DEBT CRISIS DEBT MARKET DEBT RATIO DEBT REDUCTION DEBT RELIEF DEBT REPAYMENTS DEBT SERVICE DEBT STOCK DEBT SUSTAINABILITY DEFAULT RISK DEPRECIATION DEPRECIATION RATE DEPRESSION DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT ECONOMICS DIRECTION OF TRADE DISBURSEMENTS DISCOUNT RATE DISCOUNT RATES DOMESTIC GOOD DOMESTIC GOODS DOMESTIC INTEREST RATE DOMESTIC PRICE DOMESTIC PRICES DUTCH DISEASE DYNAMIC ANALYSES DYNAMIC CONSISTENCY ECONOMETRIC ESTIMATES ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC OUTCOMES ECONOMIC POLICIES ECONOMIC RESEARCH ECONOMIC THEORY ELASTICITY ELASTICITY OF SUBSTITUTION EQUATIONS EQUILIBRIUM EXCHANGE RATE DYNAMICS EXOGENOUS SHOCKS EXPENDITURE EXPENDITURES EXPORT COMPETITIVENESS EXPORT PERFORMANCE EXPORT SHARE EXPORT SHARES EXPORTS EXTERNAL BORROWING EXTERNAL BORROWINGS EXTERNAL DEBT EXTERNAL FINANCING EXTERNAL SHOCK EXTERNAL SHOCKS EXTERNALITIES EXTREME POVERTY FISCAL POLICY FIXED EXCHANGE RATE FOREIGN CAPITAL FOREIGN DEBT FOREIGN INDEBTEDNESS FOREIGN INFLOWS FOREIGN INVESTMENTS FREE TRADE GDP GENERAL EQUILIBRIUM GENERAL EQUILIBRIUM MODEL GLOBAL ECONOMY GLOBALIZATION GOVERNMENT BUDGET GOVERNMENT REVENUE GOVERNMENT SAVINGS GROSS DOMESTIC PRODUCT GROWTH RATE GROWTH RATES HUMAN CAPITAL IMPORT IMPORT DEMAND IMPORT PRICE IMPORT PRICES IMPORT TARIFFS IMPORTS INCENTIVE EFFECTS INCOME INCOME LEVELS INCOME TAX INDUSTRIALIZATION INTEREST PARITY INTEREST RATE INTEREST RATES INTERNATIONAL BANK INTERNATIONAL DEVELOPMENT INTERNATIONAL FINANCE INTERNATIONAL LENDING INTERNATIONAL RESERVES INTERNATIONAL TRADE INVESTING INVESTMENT CAPITAL INVESTMENT DECISIONS INVESTMENT EXPENDITURE INVESTMENT EXPENDITURES INVESTMENT RATIO INVESTMENT RISES LABOR MARKET LOW-INCOME COUNTRIES LOW-INCOME COUNTRY MACROECONOMIC INSTABILITY MACROECONOMIC MANAGEMENT MACROECONOMIC STABILITY MACROECONOMICS MARGINAL COST MARGINAL PRODUCTIVITY MARKET DISCOUNT MARKET EQUILIBRIUM MONETARY FUND NOMINAL EXCHANGE RATE OIL RESERVES OPEN ECONOMY OPTIMAL INVESTMENT OPTIMIZATION OVERVALUATION POLICY RESPONSE POLICY RESPONSES PRICE CHANGE PRICE HIKE PRICE OF EXPORTS PRICE OF INVESTMENT GOODS PRIVATE CAPITAL PRODUCTION FUNCTION PRODUCTIVITY PRODUCTIVITY GROWTH PUBLIC EXPENDITURES PUBLIC EXTERNAL DEBT PUBLIC INVESTMENT PURCHASE PRICE PURCHASING POWER RATE OF RETURN REAL APPRECIATION REAL DEPRECIATION REAL EXCHANGE APPRECIATION REAL EXCHANGE RATE REAL EXCHANGE RATE ^ ^ ^ CHANGE REAL EXCHANGE RATE APPRECIATION REAL EXCHANGE RATES RELATIVE PRICE RELATIVE PRICES REMITTANCES REPAYMENT REPUDIATION RESERVES RETURN RETURNS RISK PREMIUM SAVINGS SIDE EFFECTS SOVEREIGN RISK STEADY STATE STOCK MARKET STRONG COMMODITY SUPPLY CURVE SUPPLY RESPONSE SUPPLY SIDE TAX TAX CREDITS TAX RATE TAXATION TIME HORIZON TOTAL FACTOR PRODUCTIVITY TOTAL INVESTMENT TRADE BALANCE TRADE LIBERALIZATION TRADE OPENNESS TRADE POLICY TRADE SHARE TRADE SHARES TRADE SHOCK UNCERTAINTY VALUE ADDED WORLD ECONOMY WORLD INTEREST RATE WORLD MARKETS WORLD PRICE
Online Access:	http://documents.worldbank.org/curated/en/2008/01/8947106/aid-growth-real-exchange-rate-dynamics http://hdl.handle.net/10986/6482

Description
Summary:	Devarajan, Go, Page, Robinson, and Thierfelder argued that if aid is about the future and recipients are able to plan consumption and investment decisions optimally over time, then the potential problem of an aid-induced appreciation of the real exchange rate (Dutch disease) does not occur. In their paper, "Aid, Growth and Real Exchange Rate Dynamics," this key result is derived without requiring extreme assumptions or additional productivity story. The economic framework is a standard neoclassical growth model, based on the familiar Salter-Swan characterization of an open economy, with full dynamic savings and investment decisions. It does require that the model is fully dynamic in both savings and investment decisions. An important assumption is that aid should be predictable for intertemporal smoothing to take place. If aid volatility forces recipients to be constrained and myopic, Dutch disease problems become an issue.

Aid, Growth, and Real Exchange Rate Dynamics

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