Foreign aid, debt interest repayments and Dutch disease effects in a real exchange rate model for African countries

Ahmad, A.H., Pentecost, E.J. and Stack, M.M. ORCID: 0000-0002-9213-7607, 2023. Foreign aid, debt interest repayments and Dutch disease effects in a real exchange rate model for African countries. Economic Modelling, 126: 106434. ISSN 0264-9993

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Abstract

The international competitiveness of developing countries is integral to their economic development, hence understanding the main determinants of the real exchange rate is important. The empirical literature supports the Dutch disease hypothesis that foreign aid inflows significantly contribute to a real appreciation of African currencies, but these studies do not account for the downward pressure on the exchange rate from foreign currency payments. Using a panel of sub-Saharan African countries from 1980 to 2017, we test the hypothesis that the real exchange rate appreciation from aid inflows is moderated by interest repayments on external debt. Our findings suggest that one-third of the Dutch disease effect of aid inflows on the real exchange rate is offset by external debt interest repayments. These findings are important in showing that countries with external debt servicing obligations can mitigate the Dutch disease effect of aid inflows on competitiveness.

Item Type:	Journal article
Publication Title:	Economic Modelling
Creators:	Ahmad, A.H., Pentecost, E.J. and Stack, M.M.
Publisher:	Elsevier BV
Date:	September 2023
Volume:	126
ISSN:	0264-9993
Identifiers:	Number Type 10.1016/j.econmod.2023.106434 DOI 1807248 Other
Divisions:	Schools > Nottingham Business School
Record created by:	Jeremy Silvester
Date Added:	22 Sep 2023 09:23
Last Modified:	22 Sep 2023 09:23
URI:	https://irep.ntu.ac.uk/id/eprint/49786

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