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Aid, disbursement delays, and the real exchange rate
Author:Jarotschkin, Alexandra; Kraay, Aart; Collection Title:Policy Research working paper ; no. WPS 6501Paper is funded by the Knowledge for Change Program (KCP)
Country:World; Date Stored:2013/06/25
Document Date:2013/06/01Document Type:Policy Research Working Paper
SubTopics:Macroeconomic Management; Economic Stabilization; Emerging Markets; Economic Theory & Research; Debt MarketsLanguage:English
Major Sector:Public Administration, Law, and JusticeRel. Proj ID:1W-Developing Country Fiscal Policy Responses To Crisis -- -- P120641;
Region:The World RegionReport Number:WPS6501
Sub Sectors:General public administration sectorTF No/Name:TF095859-KCPII - Developing Country Fiscal Policy Responses to the Crisis; TF012976-KCPII - Macro and Micro Lessons from Project Data; TF010545-KCP II - Macroeconomic Impacts of Aid and Public Spending
Volume No:1 of 1  

Summary: Aid donors and recipients have long been concerned that aid inflows may lead to an appreciation of the real exchange rate and an associated loss of competitiveness. This paper provides new evidence of the dynamic effects of aid on the real exchange rate, using an identification strategy that exploits the long delays between the approval of aid projects and the subsequent disbursements on them. These disbursement delays enable the isolation of a source of variation in aid inflows that is uncorrelated with contemporaneous macroeconomic shocks that may drive both aid and the real exchange rate. Using this predetermined component of aid as an instrument, there is little evidence that aid inflows lead to significant real exchange rate appreciations.

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