Aid, Exchange Rate Regimes and Post-conflict Monetary Stabilization

This paper asks whether the choice of the exchange regime matters for macroeconomic stabilization in the aftermath of civil conflicts. This important aspect of the macroeconomic agenda for post-conflict countries has been largely ignored by the literature. Using a panel of 132 countries (38 post-conflict countries and a control group of 94 economies) in the period 1970-2008 we estimate the effect of the main exchange rate regimes (fixed, managed floating and free float) on the demand for money balances and inflation. The optimality of the three Exchange rate regimes was assessed in terms of their capacity to create an ‘enabling’ policy environment for aid effectiveness in promoting the re-monetization and inflation stabilization of post-conflict economies. The evidence broadly suggests that the managed floating regime appears to have an edge.  

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