Transcript Main Issues
AID VOLATILITY AND DUTCH DISEASE:IS THERE A ROLE FOR MACROECONOMIC POLICIES AllesandroPrati + Thierry Tresser Discuss by Kolawole Olayiwola+Tajudeen Busari Main Issues The Paper addresses fundamental issues of the role of monetary and fiscal policy in enhancing the benefits and limit the undesirable effects of foreign Aid with special emhasis on Dutch disease Main Question and Approach • How macroeconomic policies should respond to foreign aid inflow • Develop a model that explain the role of monetary and fiscal policies in achieving optimal spending path, and have effects on real variables in the presence of externalities Results • When aid flows are excessively front loaded, monetary and fiscal policies improve welfare by increasing national savings in form of higher international reserves • When aid flows are excessively back-loaded, an expansionary monetary and fiscal policy improve welfare if the stock of international reserves are large Discussions • Focus on peculiar issues of developing countries with special emphasis on Africa • There are cetain unresolved issues that are peculiar to African countries and also can be used to extend the focus of the paper • Background Information 1.Is Aid an Economic variable or Political Variable? 2. What makes Aid to be volatile: Is it the volume or its expenditure pattern? 3. Who makes the decision on how Aid is spent?: the recipient countries or the donors Issues • The complementary roles of other macroeconomic policies: It is established that restrictive trade and fixed exchange rate policies mitigate the effectiveness of monetary and fiscal polices, and aggravate the impact of Dutch Disease • The role of institutions especially Central Bank and Monetary Union: there may be need to an empirical analysis of countries or region with independent central bank and others without Issues 2 • What impact do level of financial development, financial depth and capital capital openess will have on the transmission mechanism • As Pages 4 and 5 indicate Monetary and fiscal polices reduce volatility which lead to trade balance, increase consumption and growth. • What will happen in the presence of restrictive trade policy and closed economy Issue 3 • Are Political and Economic Stability Variables exogenous to the Model? • Would large aid inflow has the same impact in Nigeria or South Africa or Liberia • In many African countries, fiscal policy instruments are implemented in such a way that it distrupts the effectiveness of monetary policy eg in Nigeria (2004), despite massive monetery policy reforms, large budget deficit increase inflation to 18% Issues 4 • Imperfect market and information • Excessive control of central bank by government • Debt crises • War and disaster Conclusion • Very Good paper • Need to articulate the policy content • Thank you