Managing Reductions in Aid Inflows: Assessing Policy Choices in Haiti

By Ioana Moldovan, Marina V Rousset, Chris Walker

September 11, 2018

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Ioana Moldovan, Marina V Rousset, and Chris Walker. Managing Reductions in Aid Inflows: Assessing Policy Choices in Haiti, (USA: International Monetary Fund, 2018) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

A low-income country such as Haiti that confronts an environment of diminishing aid inflows must assess tradeoffs among the available policy options: spending cuts, monetization, sales of debt, or use of foreign reserves. To provide the analytical tools for this task, the paper draws from a set of DSGE models recently developed to evaluate policy choices in low-income countries for which external aid flows represent an important revenue source. Two simplified stylized variations of the main model are used to gain intuition and initially assess the trdeaoffs. Subsequenctly a full-scale small open economy DSGE model, calibrated to match conditions in Haiti and in similar low-income countries, is employed. Several key results are common to all model versions. While sales of foreign exchange reserves can compensate for the loss of aid inflows, this strategy is not sustainable. The remaining policy choices entail larger welfare costs, involving lower consumption levels and real depreciation. The results suggest that a mixture of spending cuts and depreciation is the best strategy, when use of foreign reserves is constrained.

Subject: Consumption, Expenditure, Financial services, Foreign aid, Foreign exchange, National accounts, Real exchange rates, Real interest rates

Keywords: Aggregate consumption, Aid, Caribbean, Consumption, Depreciation rate, Dynamic Stochastic General Equilibrium Model (DSGE), Exchange rate depreciation, Exchange rate fluctuation, Fiscal Policy, Foreign Reserves, Global, Government spending cut, Haiti, Labor disutility parameter, Labor income, Labor supply decision, Monetary Policy, Monopolistic competition, Nominal exchange rate, Open economy, Public Investment, Real exchange rates, Real interest rate, Real interest rates, Steady-state labor, Western Hemisphere, WP

Publication Details

Pages:

66
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/198
Stock No:

WPIEA2018198
ISBN:

9781484370322
ISSN:

1018-5941

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