This paper examines the properties of alternative monetary policy rules in response to large aid surges in low-income countries characterized by incomplete capital market integration and currency substitution. Using a dynamic stochastic general equilibrium model, it is shown that simple monetary...

The volume of foreign aid has increased during the last four decades, albeit with interruptions in certain years. Over time, the major recipients have changed: while the share of aid to Asia has diminished since the 1980s, that destined for sub-Saharan Africa has grown. There is some evidence...

The authors investigate the macroeconomic challenges created by a surge in aid inflows. They develop an analytical framework for examining possible policy responses to increased aid, in terms of absorption and spending of aid-where the central bank controls absorption, through monetary policy...