We analyze some potential adverse macroeconomic side-effects of aid transfers: Real appreciation of the recipient′s currency may impair the aggregate output via crowding-out productive export sectors, the so-called Dutch Disease.
We use simplified balance sheets to elucidate the effects of four typical combinations of the following actions: The government may or may not spend the value of the aid transfer for nontradable goods. The central bank may or may not sell the respective reserves.
If the loss of competitiveness induced by the appreciation is over-compensated by the improved productivity induced by the use of the transfer, then there is no need to worry about the Dutch Disease.
© 2012 by Lucius & Lucius, Stuttgart