Jarotschkin, AlexandraKraay, Aart2013-09-262013-09-262013-05https://hdl.handle.net/10986/15860Aid donors and recipients have long been concerned that aid inflows may lead to an appreciation of the real exchange rate and an associated loss of competitiveness. This paper provides new evidence of the dynamic effects of aid on the real exchange rate, using an identification strategy that exploits the long delays between the approval of aid projects and the subsequent disbursements on them. These disbursement delays enable the isolation of a source of variation in aid inflows that is uncorrelated with contemporaneous macroeconomic shocks that may drive both aid and the real exchange rate. Using this predetermined component of aid as an instrument, there is little evidence that aid inflows lead to significant real exchange rate appreciations.en-USCC BY 3.0 IGOAUTOREGRESSIONBANK LENDINGBENCHMARKBIDBLACK MARKETCAPITAL INFLOWSCDCENTRAL BANKSCHECKSCOMPETITIVENESSCOUNTRY FIXED EFFECTSCOUNTRY SAMPLECREDITORCREDITORSDEBTORDEBTOR REPORTING SYSTEMDEFLATORSDEVELOPING COUNTRIESDEVELOPING COUNTRYDEVELOPMENT ASSISTANCEDEVELOPMENT BANKDEVELOPMENT ECONOMICSDEVELOPMENT POLICYDISBURSEMENTDISBURSEMENTSDISEQUILIBRIUMDOMESTIC FINANCIAL MARKETSDOMESTIC PRICEDOMESTIC PRICE LEVELECONOMIC PERFORMANCEECONOMIC REVIEWELASTICITYELASTICITY OF SUPPLYEMPIRICAL EVIDENCEEXCHANGE RATE ARRANGEMENTSEXCHANGE RATE REGIMEEXCHANGE RATE REGIMESEXPORT SECTOREXTERNALITYFINANCIAL MARKETSFINANCIAL SUPPORTFIXED EXCHANGE RATEFLEXIBLE EXCHANGE RATEFLEXIBLE EXCHANGE RATE REGIMEFLEXIBLE EXCHANGE RATE REGIMESFOREIGN EXCHANGEGDPGOVERNMENT SPENDINGHIGH INFLATIONINCOMEINCOME COUNTRIESINDIVIDUAL LOANSINDUSTRIALIZATIONINSTRUMENTINTERNATIONAL BANKINTERNATIONAL DEVELOPMENTINTERNATIONAL ECONOMICSINTERNATIONAL MONETARY FUNDLOANLOAN APPROVALLOAN APPROVALSLONG TERMM1M2MACROECONOMIC CRISISMACROECONOMIC MANAGEMENTMACROECONOMIC POLICIESMACROECONOMIC POLICYMACROECONOMIC SHOCKSMACROECONOMICSMONETARY FUNDMONETARY POLICYMULTILATERAL TRADEMULTIPLIERSNOMINAL EXCHANGE RATEOPEN ECONOMYOVERVALUATIONPOLICY RESEARCHPOLICY RESPONSEPOVERTY REDUCTIONPRICE LEVELSPUBLIC SPENDINGREAL APPRECIATIONREAL EXCHANGEREAL EXCHANGE RATEREAL EXCHANGE RATESRELATIVE PRICEREPAYMENTSRESERVERESERVESSIDE EFFECTSSMALL COUNTRIESTECHNICAL ASSISTANCETRANSFER PARADOXUNDERVALUATIONWORLD ECONOMYDutch diseaseaidWorld Bank10.1596/1813-9450-6501