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The impact of the Interaction between institutional quality and aid volatility on growth: theory and evidence

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  • Kathavate, Jay
  • Mallik, Girijasankar
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    Abstract

    We analyze both theoretically and empirically, the effect of aid volatility and its interaction effect with institutional quality on per capita economic growth. Our theoretical model, in which an aid-recipient government, operating in an institutional environment of some given quality (making choices over the distribution of aid), predicts that a negative effect of aid volatility on growth is mitigated by stronger institutional quality. We use panel data covering the period 1984–2004 for 78 countries to test this theoretical prediction. Using Generalised Methods of Moments (GMM) we find the relationship between growth and aid volatility is significantly negative and depends on institutional quality. Our baseline results are robust to various computations of aid volatility and foreign aid, time periods, sub-samples and additional covariates.

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    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 29 (2012)
    Issue (Month): 3 ()
    Pages: 716-724

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    Handle: RePEc:eee:ecmode:v:29:y:2012:i:3:p:716-724

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    Web page: http://www.elsevier.com/locate/inca/30411

    Related research

    Keywords: Foreign aid; Volatility; Institutional quality;

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    Cited by:
    1. Qayyum, Unbreen & Musleh ud, Din & Haider, Adnan, 2012. "Foreign Aid, External Debt and Governance," MPRA Paper 40260, University Library of Munich, Germany.

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