rate after 5 years. Moreover, the differences between the estimated responses in the two exchange rate regimes are small relative to the estimated standard errors. Overall, the estimated long-run response of the real exchange rate is very similar in the fixed and flexible nominal exchange rate regimes, and even the larger initial depreciation in the flexible exchange rate regime falls within the estimated 95 percent confidence interval for the benchmark estimate.

We next investigate the role of reserve accumulation in potentially obscuring aid-induced real appreciations. Specifically, we augment our baseline specification with the change in net reserves, expressed as a share of GDP. The results do not suggest that controlling for reserve accumulation significantly changes the estimated impact of aid on the real effective exchange rate. We see barely any difference in the size and significance of the estimated impulse response for the full sample. Only in the high aid and IDA samples, we find a contemporaneous depreciation that is slightly smaller than in the benchmark results and less significant.<sup>7</sup> Finally, we consider the extent to which the composition of aid matters for its impact on the real exchange rate. As discussed above, the most basic version of the theory suggests that aid resources that are spent domestically will have a greater positive effect on the real exchange rate than aid that is spent on imports. Unfortunately, it is difficult to observe this conceptual distinction clearly in the net ODA data with which we work. This is because, while there is considerable detail on different types of aid flows, they are not classified according to the location where they are spent. As a rough approximation, we subtract out from net ODA three categories of aid that are more likely to end up being spent on foreign goods and/or services: technical cooperation (which typically is used to purchase the services of consultants from developed countries); development food aid (which most often is delivered in kind and so does not involve domestic purchases in the recipient country); and humanitarian assistance (which often also is used to purchase goods and services from rich countries that can immediately be used for disaster relief). For the median country-year observation in the full sample, these three categories account for 28% of aid, and for 21% and 23% of aid in the high aid and

> 7 Although not reported for reasons of space, we do find that reserve accumulation is negatively correlated with changes in the real exchange rate, although generally not significantly so.  This is consistent with the mechanism discussed above:  if capital inflows go to reserve accumulation rather than being spent domestically on non-tradeables, the effect on the real exchange rate will be smaller.  Hence, when we control for reserve accumulation we eliminate this source of downward bias in the estimated effect of aid on the real exchange rate. Moreover, the significant result in horizon=3 in the IDA sample is driven by a handful of influential observations. Applying the Hadi procedure leads to a similar result as in the benchmark specification for this sample in this horizon but leaves the coefficient insignificant.

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