Managing Macroeconomic Risks in Developing Countries: Policies and Institutions

Paul Collier, Christopher Adam and David Vines

This project is part of the World Economy and Finance Programme, funded by the ESRC 

Project Summary

The fortunes of developing countries, especially the poorest, remain hugely determined by their vulnerability to external shocks, particularly those caused by volatility in world prices for oil and other primary commodities, in climatic conditions, in aid flows and, increasingly, in private capital flows. If poorly managed, the destabilizing effects of external shocks are deeply inimical to long-run growth and poverty reduction. The benefits from efficient policy responses to such shocks are therefore high, but in many developing countries central banks and the fiscal authorities (as well as agencies such as the IMF) are still struggling to define coherent strategies capable of supporting the efficient macroeconomic management of risk and volatility. This research programme will use analytical economic techniques to consider the design of institutions, instruments and policies in such circumstances. We focus on three themes. First, we examine the properties of alternative monetary, fiscal and exchange rate policy choices in delivering efficient macroeconomic outcomes in the face of aid, commodity price and climate shocks in low-income countries. Second, we examine how macroeconomic policy can be conducted, and how the supporting global financial architecture can be modified, to minimise the risks of financial crises as capital market access improves and private capital flows dominate official aid flows. Finally, we investigate strategies for improving the insurance role of aid so that efficient donor aid allocations respond efficiently to oil and commodity price shocks.