(2018-07) Managing Reductions in Aid Inflows Haiti
Summary — This paper analyzes policy choices for Haiti in managing reductions in aid inflows, using DSGE models to assess tradeoffs between spending cuts, monetization, debt sales, and reserve use. It finds that a mix of spending cuts and depreciation is the best strategy when foreign reserves are constrained, while sales of foreign exchange reserves can compensate for the loss of aid inflows, but this strategy is not sustainable.
Key Findings
- Sales of foreign exchange reserves can compensate for aid loss but are unsustainable.
- Spending cuts and depreciation are the best strategy when reserves are constrained.
- Aid cuts matched by bond sales lead to real depreciation and higher interest rates.
- Monetization triggers real depreciation, higher inflation, and nominal depreciation.
- Liquidity-constrained households are significantly worse off with spending cuts or debt sales.
Full Description
This paper examines the policy options available to Haiti in the face of diminishing aid inflows, assessing the tradeoffs between spending cuts, monetization, sales of debt, and the use of foreign reserves. Using a set of DSGE models, the analysis suggests that while sales of foreign exchange reserves can temporarily compensate for the loss of aid, this strategy is not sustainable. The remaining policy choices entail larger welfare costs, involving lower consumption levels and real depreciation. The results indicate that a mixture of spending cuts and depreciation is the best strategy when the use of foreign reserves is constrained, highlighting the importance of fiscal discipline and flexible exchange rate management.
Notes
IMF Working Paper (WP18-198)