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Foreign Aid and Government's Fiscal Behaviour in Nepal: An Empirical Analysis

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  • Bhattarai, Badri Prasad

    (School of Economics and Finance, University of Western Sydney, Parramatta Australia)

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    Abstract

    Using the cointegration technique, this paper examines the revenue and expenditure behaviour of the Nepalese government in the presence of foreign aid for the period 1975–2002. The results show that aid positively affects both development and non-development expenditure in the long run. However, the long-run relationship between aid and non-development expenditure is found to be stronger than that between aid and development expenditure. Since aid is generally given for development expenditure, these results indicate the possibility of diversion of aid to non-development expenditure. Thus, the long-run relationship between aid and non-development expenditure may indicate aid fungibility. On the other hand, no evidence is found in favour of the hypothesis that aid availability makes the government lazy in terms of domestic revenue mobilisation.

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    Bibliographic Info

    Article provided by Queensland University of Technology (QUT), School of Economics and Finance in its journal EAP (Economic Analysis and Policy).

    Volume (Year): 37 (2007)
    Issue (Month): 1 (March)
    Pages: 41-60

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    Handle: RePEc:eap:articl:v:37:y:2007:i:1:p:41-60

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    Keywords: Aid; Development; Expenditure; Foreign Aid; Government;

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    References

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    1. Swaroop, Vinaya & Jha, Shikha & Sunil Rajkumar, Andrew, 2000. "Fiscal effects of foreign aid in a federal system of governance: The case of India," Journal of Public Economics, Elsevier, vol. 77(3), pages 307-330, September.
    2. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
    3. Franco-Rodriguez, Susana & Morrissey, Oliver & McGillivray, Mark, 1998. "Aid and the Public Sector in Pakistan: Evidence with Endogenous Aid," World Development, Elsevier, vol. 26(7), pages 1241-1250, July.
    4. Sharma, Kishor, 2006. "The political economy of civil war in Nepal," World Development, Elsevier, vol. 34(7), pages 1237-1253, July.
    5. Pesaran, M. Hashem & Shin, Yongcheol, 1996. "Cointegration and speed of convergence to equilibrium," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 117-143.
    6. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    7. Heller, Peter S, 1975. "A Model of Public Fiscal Behavior in Developing Countries: Aid, Investment, and Taxation," American Economic Review, American Economic Association, vol. 65(3), pages 429-45, June.
    8. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
    9. Mark McGillivray & Bazoumana Ouattara, 2005. "Aid, Debt Burden and Government Fiscal Behaviour in Côte d'Ivoire," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 14(2), pages 247-269, June.
    10. Susana Franco-Rodriguez, 2000. "Recent developments in fiscal response with an application to Costa Rica," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 429-441.
    11. Susana Franco-Rodriguez, & Mark McGillivray, & Oliver Morrissey, . "Aid and the Public Sector in Pakistan: Evidence with Endogenous Aid," Discussion Papers 98/2, University of Nottingham, CREDIT.
    12. McGillivray, Mark, 2000. "Aid and Public Sector Behavior in Developing Countries," Review of Development Economics, Wiley Blackwell, vol. 4(2), pages 156-63, June.
    13. Pack, Howard & Pack, Janet Rothenberg, 1993. "Foreign Aid and the Question of Fungibility," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 258-65, May.
    14. White, Howard, 1994. "Foreign aid, taxes and public investment: A further comment," Journal of Development Economics, Elsevier, vol. 45(1), pages 155-163, October.
    15. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
    16. Feyzioglu, Tarhan & Swaroop, Vinaya & Zhu, Min, 1998. "A Panel Data Analysis of the Fungibility of Foreign Aid," World Bank Economic Review, World Bank Group, vol. 12(1), pages 29-58, January.
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    Cited by:
    1. Arvin, B. Mak & Kayani, Zafar, 2009. "Donor Motivation of Inter-Temporal Foreign Assistance to Nepal," Review of Applied Economics, Review of Applied Economics, vol. 5(1-2).

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