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Foreign Aid and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy

Foreign Aid and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy by Stephen J. Turnovsky
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A dynamic dependent-economy model is developed to investigate the role of the real exchange rate in determining the effects of foreign aid. If capital is perfectly mobile between sectors, untied aid has no longrun impact on the real exchange rate. A decline in the traded sector occurs because aid, being denominated in traded output, substitutes for exports in financing imports. While untied aid causes short-run real exchange appreciation, this response is very temporary and negligibly small. Tied aid, by influencing sectoral productivity, does generate permanent relative price effects. The analysis, which employs extensive numerical simulations, emphasizes the tradeoffs between real exchange adjustments, long-run capital accumulation, and economic welfare, associated with alternative forms of foreign aid.
International Monetary Fund; August 2008
45 pages; ISBN 9781452768250
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Title: Foreign Aid and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy
Author: Stephen J. Turnovsky; Serpil Tekin; Valerie Cerra
 
ISBNs
1451915152
9781451870626
9781451915150
9781452768250