The effect of foreign aid on economic activity of a country can be dampened due to potentially adverse effects on exports through a real exchange rate appreciation. In this study we examine the long-term relationship between export performance and foreign aid in developing countries while accounting for other factors. The estimates of direct effect of foreign aid on exports are imprecise. However, the effect of the quadratic term of foreign aid on exports is negative and precise. This implies large amount of foreign aid does adversely affect export performance. The results are robust to the use of two different export performance measures and different sub-samples.
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Publisher Info
Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number
2007-023.
Length: Date of creation: 2007 Date of revision: Publication status: Published in Theory and Practice of Foreign Aid, Sajal Lahiri editor, Elsevier, 2007, pp. 421-33 Handle: RePEc:fip:fedlwp:2007-023
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