Managing Reductions in Aid Inflows Haiti

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.