Working Paper: CEPR ID: DP45
Authors: Sweder van Wijnbergen
Abstract: We construct an open economy disequilibrium model to assess the welfare effects of aid in different macroeconomic regimes. Aid is shown to have different effects in different unemployment regimes because it increases the social costs of wage-price rigidities in the classical regime but decreases them in the Keynesian unemployment regime. A link is made with the two-gap model, but we highlight the role of real exchange rate misalignment (failure to clear the NT goods market).
Keywords: open economy; disequilibrium; aid; twogap model
JEL Codes: 112; 443
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Aid (F35) | social costs of wage-price rigidities (classical regime) (E64) |
| Aid (F35) | social costs of wage-price rigidities (Keynesian regime) (E64) |
| Aid (F35) | discrepancy between actual and equilibrium real exchange rates (Keynesian regime) (F31) |
| discrepancy between actual and equilibrium real exchange rates (Keynesian regime) (F31) | welfare (I38) |
| Aid (F35) | discrepancy between actual and equilibrium real exchange rates (classical regime) (F31) |
| discrepancy between actual and equilibrium real exchange rates (classical regime) (F31) | welfare (I38) |