Gearing Macroeconomic Policies To Manage Large Inflows Of ODA

This paper examines how macroeconomic policies can be managed to accommodate a large inflow of foreign aid to combat the HIV/AIDS epidemic and still maintain macroeconomic stability. Because of the daunting scale of this epidemic, funds need to be disbursed urgently in order to contain its spread, yet some economists worry that rapidly scaling up foreign assistance for this purpose will cause inflation and appreciation of the real exchange rate. If such effects occur, they could impair a country's international competitiveness and endanger its growth prospects. However, this paper maintains that such effects can be minimized if governments and central banks coordinate fiscal, monetary and exchange rate policies.