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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