18 how much of its aid to spend and to save, which fraction of spending should fall on traded and non-traded goods, and which part of saving should be used to build-up foreign-currency and domestic-currency public-sector net assets. The latter decisions are shaped by domestic economic and political factors, as well as by aid conditionality, which depend on country and conflict-specific conditions.

The flow of aid to post-conflict countries appears not to be well synchronized with country capacity to absorb aid. While post-conflict countries capacity to absorb aid (i.e., the quality of their policies and institutions) is built up only gradually after peace onset, the evidence suggests that aid tends to peak immediately after peace is attained and decline thereafter. This suggests that the timing of aid is often not optimal; too much aid is provided too early and is reduced prematurely. However, aid composition broadly reflects post-conflict priorities, with large parts of aid financing social expenditure and infrastructure investment.

The evidence shows that many post-conflict countries reduced public debt and increased international reserves substantially. The latter forms of saving aid contributed to avoid significant RER appreciation in post-conflict countries. The long-term (1970-2000) correlation between aid and the RER is either non-significant or negative in 29 out of 32 conflict countries. All this partial evidence suggests little prima-facie evidence of Dutch disease during post-conflict surges – but more systematic multivariate evidence is required to assess the sensitivity of RERs to aid flows.

We have provided the latter evidence from an error-correction model for the RER, based on conventional and non-conventional determinants, including foreign aid. The empirical results – based on a world sample of 1980-2004 annual data for 83 countries – point out that aid has significant, but small, long-term effects on the RER, controlling for a host of policy and structural fundamentals. We used the latter results to compute RER misalignment (rermis), breaking it down according to the contribution of deviations of fundamentals (including aid) from their long-term trend values and of short-term dynamics. Our results point out that the median post-conflict country suffered from moderate RER overvaluation after the start of peace, during _PeaceOnset_ and _PostConf1_ sub-periods. However, rermis observed during post-conflict periods cannot be traced down to the aid flows that peaked during _PeaceOnset_ during this sub-period. Therefore large aid flows have not been a major factor in the moderate RER overvaluation observed in post-conflict experiences.

The empirical evidence on growth in the world presented in this paper reveals new findings about the pattern of catch-up growth during post-conflicts and the role of some key growth determinants of post-conflict growth. Aid is an important determinant of growth. Prima facie, there is evidence of a large peace bonus earned in years 2-9 after the start of peace. However, this evidence on the direct linear effects of peace on growth fades away when considering the interaction between foreign aid and post-conflict periods, which shows that it is the latter interaction that matters significantly for growth. Hence peace per se does not improve growth – it only affects growth when combined with large aid.