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The Dynamic Implications of Foreign Aid and its Variability

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  • Timothy D. Lane
  • Leslie Lipschitz
  • Cristina Arellano
  • Ales Bulir

Abstract

The paper examines the effects of aid and its volatility on consumption, investment, and the structure of production in the context of an intertemporal two-sector general equilibrium model. A permanent flow of aid finances mainly consumption, a result consistent with the historical failure of aid inflows to translate into sustained growth. Shocks to aid are reflected mainly in investment fluctuations, as a result of consumption smoothing. Aid shocks result in substantial welfare losses, suggesting that aid variability should be taken into account in designing aid architecture. These results are consistent with the evidence from cross-country regressions of manufactured exports.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/119.

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Length: 41
Date of creation: 01 Jun 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/119

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Keywords: Economic models; Transfer of real resources; tradable goods; nontradable goods; standard deviation; elasticity of substitution; terms of trade; correlation; sensitivity analysis; equation; equations; calibration; autocorrelation; equilibrium model; aggregate consumption; general equilibrium model; political economy; standard errors; export performance; statistics; standard error; domestic market; empirical model; probability; stochastic model; standard deviations; trade data; trade taxes; constant elasticity of substitution; trade shocks; international trade; descriptive statistics; measurement error; equilibrium solution; terms-of-trade shocks; counting; predictability; rent-seeking behavior; horizontal axis; optimization; constant mean; general equilibrium models; survey; calibrations; probability distribution; outliers; terms of trade shocks; export taxes; transition countries; export prices; exchange rate fluctuations; parameter estimate; trade deficit; transport cost; numerical analysis; export industries; simulation results; return on capital; external trade; nominal interest rates;

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References

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