Aid, Exports, and Growth: a Time-Series Perspective on the Dutch Disease Hypothesis
AbstractThe available evidence on the effects of aid on growth is notoriously mixed. We use a novel empirical methodology, a heterogeneous panel vector-autoregression model identified through factor analysis, to study the dynamic response of exports, imports, and per capita GDP growth to a “global” aid shock (the common component of individual country aid-to-GDP ratios). We find that the estimated cumulative responses of exports and per capita GDP growth to a global aid shock are strongly positively correlated, and both responses are inversely related to exchange rate overvaluation measures. We interpret this evidence as consistent with the Dutch disease hypothesis. However, we also find that, in countries with less overvalued real exchange rates, exports and per capita GDP growth respond positively to a global aid shock. This evidence suggests that preventing exchange rate overvaluations may allow aid-receiving countries to avoid the Dutch disease.
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Bibliographic InfoArticle provided by Università di Perugia, Dipartimento Economia, Finanza e Statistica in its journal Review of Economics and Institutions.
Volume (Year): 3 (2012)
Issue (Month): 2 ()
aid; common factors; Dutch disease; growth; panel VARs; exchange rate overvaluation;
Other versions of this item:
- Joong Shik Kang & Alessandro Prati & Alessandro Rebucci, 2010. "Aid, Exports, and Growth: A Time-Series Perspective on the Dutch Disease Hypothesis," Research Department Publications 4678, Inter-American Development Bank, Research Department.
- Joong Shik Kang & Alessandro Prati & Alessandro Rebucci, 2013. "Aid, Exports, and Growth: A Time-Series Perspective on the Dutch Disease Hypothesis," IMF Working Papers 13/73, International Monetary Fund.
- F35 - International Economics - - International Finance - - - Foreign Aid
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
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