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Riding the Wave: Monetary Responses to Aid Surges in Low-Income Countries Edward Buffie, University of Indiana Christopher Adam, CSAE, University of Oxford Stephen O'Connell, Swarthmore College, PA and CSAE, University of Oxford Catherine Pattillo, International Monetary Fund and CSAE, University of Oxford WPS/2006-04 Download the Paper (PDF format) - January 1, 2006 Tell a colleague about it. Printing Tips: Select 'print as image' in the Acrobat print dialog if you have trouble printing. ABSTRACT: We focus on the management of highly persistent shocks to aid flows, including HIPC or MDG-related increases in net flows,in the presence of currency substitution by the domestic private sector.Such shocks have beneficent long-runs effects, but when currency substitution is high they can produce dramatic macroeconomic management problems in the short run. What is the appropriate mix of money and exchange rate targeting in such cases, and the role of temporary sterilization? We analyze these and related issues in an intertemporal optimizing model that allows a portion of aid to be devoted to reducing the government's seigniorage requirement. Our results argue that a managed float, with little or no sterilization of increases in the monetary base, is the most attractive approach. SUGGESTED CITATION: Edward Buffie, Christopher Adam, Stephen O'Connell, and Catherine Pattillo, "Riding the Wave: Monetary Responses to Aid Surges in Low-Income Countries" (January 1, 2006). The Centre for the Study of African Economies Working Paper Series. Working Paper 248. http://www.bepress.com/csae/paper248