Chapter 13: Aid Volatility, Monetary Policy Rules and the Capital Account in African Economies
Christopher Adam,* Stephen O’Connell and Edward Buffie 13.1 INTRODUCTION The conduct of monetary policy in Africa has undergone significant changes since the mid-1990s. Shifts in the macroeconomic orthodoxy in favour of tighter fiscal control and the emergence of low and stable inflation as a central policy objective of governments across the continent have been reinforced by greater institutional independence of central banks and the removal of administrative controls in foreign exchange and financial markets. Together, these have afforded central banks a degree of protection against excessive fiscal pressures and provided them with the instruments with which to pursue their inflation targets. The removal of exchange controls has reduced exchange rate policy to choices regarding the degree of flexibility of a unified exchange rate, while the shift away from interest rate controls and directed credit has facilitated a move from direct to indirect instruments for controlling overall liquidity, albeit in the context of relatively thin and oligopolistic asset markets. These institutional changes have occurred against a changing macroeconomic environment across the continent. Many African central banks are currently confronting the challenge of managing rapidly rising primary export prices, often in circumstances where successful adjustment and debt relief programmes have prompted surges in official aid flows. At the same time, and in response to these same developments, short-run private capital inflows have become an important feature of the landscape. In Zambia, for example, foreign investors currently hold around 20 per cent of the stock of domestic government bonds (IMF, 2007a), while in...
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