Description:
<jats:title>Summary</jats:title>
<jats:p>We analyze some potential adverse macroeconomic side-effects of aid transfers: Real appreciation of the recipient′s currency may impair the aggregate output via crowding-out productive export sectors, the so-called Dutch Disease. </jats:p>
<jats:p>We use simplified balance sheets to elucidate the effects of four typical combinations of the following actions: The government may or may not spend the value of the aid transfer for nontradable goods. The central bank may or may not sell the respective reserves. </jats:p>
<jats:p>If the loss of competitiveness induced by the appreciation is over-compensated by the improved productivity induced by the use of the transfer, then there is no need to worry about the Dutch Disease.</jats:p>