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The short-run macroeconomic impact of foreign aid to small states: An agnostic time series analysis

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Author Info

  • Hansen, Henrik
  • Headey, Derek

Abstract

"We herein investigate the short-run macroeconomic impact of aid in small developing countries (SDCs) by using a vector auto regression (VAR) model to study the impact of aid on net import (absorption) and domestic demand (spending). We focus on average country effects within two country sub-groups, and find substantial differences between ‘aid-dependent' SDCs and other SDCs that are more dependent on natural resources, tourism or financial services. In aid-dependent SDCs, aid absorption more or less equals spending, although only half of the aid flow is absorbed and spent. In the non-aid-dependent group, aid does not seem to be absorbed or spent in any systematic fashion." from authors' abstract

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Bibliographic Info

Paper provided by International Food Policy Research Institute (IFPRI) in its series IFPRI discussion papers with number 863.

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Date of creation: 2009
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Handle: RePEc:fpr:ifprid:863

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Keywords: Foreign aid; Small states; Vector auto regression; Mean group estimator; Macroeconomic impacts; Development strategies; Public investment;

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  1. Robert Osei & Oliver Morrissey & Tim Lloyd, 2005. "The fiscal effects of aid in Ghana," Journal of International Development, John Wiley & Sons, Ltd., vol. 17(8), pages 1037-1053.
  2. Pallage, Stephane & Robe, Michel A, 2001. "Foreign Aid and the Business Cycle," Review of International Economics, Wiley Blackwell, vol. 9(4), pages 641-72, November.
  3. Tony Killick & Mick Foster, 2007. "The Macroeconomics of Doubling Aid to Africa and the Centrality of the Supply Side," Development Policy Review, Overseas Development Institute, vol. 25(2), pages 167-192, 03.
  4. Shekhar Aiyar & Ummul Hasanath Ruthbah, 2008. "Where Did All the Aid Go? An Empirical Analysis of Absorption and Spending," IMF Working Papers 08/34, International Monetary Fund.
  5. Milner, Chris & Westaway, Tony, 1993. "Country size and the medium-term growth process: Some cross-country evidence," World Development, Elsevier, vol. 21(2), pages 203-211, February.
  6. Harvey W. Armstrong & Robert Read, 2002. "The phantom of liberty?: economic growth and the vulnerability of small states," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(4), pages 435-458.
  7. Ale Bulir & A. Javier Hamann, 2003. "Aid Volatility: An Empirical Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 4.
  8. Andrew Berg & Mumtaz Hussain & Shaun K. Roache & Amber Mahone & Tokhir N. Mirzoev & Shekhar Aiyar, 2007. "The Macroeconomics of Scaling Up Aid," IMF Occasional Papers 253, International Monetary Fund.
  9. Peter S. Heller & Sanjeev Gupta, 2002. "Challenges in Expanding Development Assistance," IMF Policy Discussion Papers 02/5, International Monetary Fund.
  10. H Armstrong, R de Kervenoael, Xiao-Ming Li and R Read, . "A Comparision of the economic performance of different micro-states and between micro-states and larger countries," Working Papers ec9/97, Department of Economics, University of Lancaster.
  11. Streeten, Paul, 1993. "The special problems of small countries," World Development, Elsevier, vol. 21(2), pages 197-202, February.
  12. Bulír, Ales & Hamann, A. Javier, 2008. "Volatility of Development Aid: From the Frying Pan into the Fire?," World Development, Elsevier, vol. 36(10), pages 2048-2066, October.
  13. Easterly, William & Kraay, Aart, 2000. "Small States, Small Problems? Income, Growth, and Volatility in Small States," World Development, Elsevier, vol. 28(11), pages 2013-2027, November.
  14. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
  15. Barten, A. P., 1969. "Maximum likelihood estimation of a complete system of demand equations," European Economic Review, Elsevier, vol. 1(1), pages 7-73.
  16. Christopher A. Sims & Tao Zha, 1995. "Error bands for impulse responses," Working Paper 95-6, Federal Reserve Bank of Atlanta.
  17. Briguglio, Lino, 1995. "Small island developing states and their economic vulnerabilities," World Development, Elsevier, vol. 23(9), pages 1615-1632, September.
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Cited by:
  1. Lof, Matthijs & Mekasha, Tseday Jemaneh & Tarp, Finn, 2013. "Aid and income: Another time-series perspective," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  2. Qayyum, Unbreen & Musleh ud, Din & Haider, Adnan, 2012. "Foreign Aid, External Debt and Governance," MPRA Paper 40260, University Library of Munich, Germany.
  3. Robert Gillanders, 2011. "The Effects of Foreign Aid in Sub-Saharan Africa," Working Papers 201116, School Of Economics, University College Dublin.
  4. Jonathan R. W. Temple & Nicolas Van de Sijpe, 2014. "Foreign Aid and Domestic Absorption," CSAE Working Paper Series 2014-01, Centre for the Study of African Economies, University of Oxford.
  5. Shonchoy, Abu, 2010. "The Dynamics of Spending and Absorption of Aid: Panel Data Analysis," MPRA Paper 24530, University Library of Munich, Germany.

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