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Foreign Aid and Domestic Absorption

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  • Jonathan R. W. Temple
  • Nicolas Van de Sijpe

Abstract

We introduce a new ‘supply-push’ instrument for foreign aid, to be used together with an instrumental variable estimator that filters out interactive fixed effects. We use this instrument to study the effects of aid on macroeconomic ratios, and especially the ratios of consumption, investment, imports and exports to GDP. We cannot reject the hypothesis that aid is fully absorbed rather than used to build foreign reserves or exiting as capital flight, nor do we find evidence of Dutch Disease effects. Aid increases consumption, and there is also some evidence that aid raises investment, but with a delayed effect.

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File URL: http://www.csae.ox.ac.uk/workingpapers/pdfs/csae-wps-2014-01.pdf
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Bibliographic Info

Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2014-01.

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Date of creation: 2014
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Handle: RePEc:csa:wpaper:2014-01

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  15. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, 07.
  16. Arndt Channing & Jones Sam & Tarp Finn, 2010. "Aid, Growth, and Development: Have We Come Full Circle?," Journal of Globalization and Development, De Gruyter, vol. 1(2), pages 1-29, December.
  17. Harding, Matthew & Lamarche, Carlos, 2011. "Least squares estimation of a panel data model with multifactor error structure and endogenous covariates," Economics Letters, Elsevier, vol. 111(3), pages 197-199, June.
  18. Tavares, Jose, 2003. "Does foreign aid corrupt?," Economics Letters, Elsevier, vol. 79(1), pages 99-106, April.
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