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The Dynamic Implications of Foreign Aid and Its Variability

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Author Info
Cristina Arellano
Aleš Bulir
Timothy D. Lane
Leslie Lipschitz

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

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Length: 41 pages
Date of creation: 27 Jun 2005
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Handle: RePEc:imf:imfwpa:05/119

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  8. Mendoza, Enrique G., 1997. "Terms-of-trade uncertainty and economic growth," Journal of Development Economics, Elsevier, vol. 54(2), pages 323-356, December. [Downloadable!] (restricted)
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  10. Aaron Tornell & Philip R. Lane, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March. [Downloadable!] (restricted)
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  13. Brock, Philip L & Turnovsky, Stephen J, 1994. "The Dependent-Economy Model with Both Traded and Nontraded Capital Goods," Review of International Economics, Blackwell Publishing, vol. 2(3), pages 306-25, October.
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  14. Turnovsky, Stephen J. & Chattopadhyay, Pradip, 2003. "Volatility and growth in developing economies: some numerical results and empirical evidence," Journal of International Economics, Elsevier, vol. 59(2), pages 267-295, March. [Downloadable!] (restricted)
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  15. Michaely, Michael, 1981. "Foreign aid, economic structure, and dependence," Journal of Development Economics, Elsevier, vol. 9(3), pages 313-330, December. [Downloadable!] (restricted)
  16. Dani Rodrik, 1998. "Trade Policy and Economic Performance in Sub-Saharan Africa," NBER Working Papers 6562, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Corden, W M, 1984. "Booming Sector and Dutch Disease Economics: Survey and Consolidation," Oxford Economic Papers, Oxford University Press, vol. 36(3), pages 359-80, November. [Downloadable!] (restricted)
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  23. Reinhart, Carmen & Ostry, Jonathan, 1991. "Private Saving and Terms of Trade Shocks," MPRA Paper 13716, University Library of Munich, Germany. [Downloadable!]
  24. Arne Bigsten & Paul Collier & Stefan Dercon & Marcel Fafchamps & Bernard Gauthier & Jan Willem Gunning & Abena Oduro & Remco Oostendorp & Catherine Pattillo & Måns Söderbom & Francis Teal & Alb, 2004. "Do African Manufacturing Firms Learn from Exporting?," The Journal of Development Studies, Taylor and Francis Journals, vol. 40(3), pages 115-141, February. [Downloadable!] (restricted)
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  25. Wolfgang Mayer & Alex Mourmouras, 2002. "Vested Interests in a Positive Theory of IFI Conditionality," IMF Working Papers 02/73, International Monetary Fund.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Frot, Emmanuel & Santiso, Javier, 2009. "Herding in Aid Allocation," SITE Working Paper Series 5, Stockholm Institute of Transition Economics, Stockholm School of Economics, revised 02 Oct 2009. [Downloadable!]
    Other versions:
  2. Pierre-Richard Agénor & Joshua Aizenman, 2007. "Aid Volatility and Poverty Traps," NBER Working Papers 13400, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Almuth Scholl, 2009. "Aid Effectiveness and Limited Enforceable Conditionality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(2), pages 377-391, April. [Downloadable!] (restricted)
    Other versions:
  4. Serpil Tekin & Stephen J. Turnovsky & Valerie Cerra, 2008. "Foreign Aid and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy," IMF Working Papers 08/204, International Monetary Fund. [Downloadable!]
  5. Clarke, Matthew & Fry, Tim & Mihajilo, Sandra, 2007. "Aid Allocation Volatility to Small Island States," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  6. Thierry Tressel & Alessandro Prati, 2006. "Aid Volatility and Dutch Disease: Is There a Role for Macroeconomic Policies?," IMF Working Papers 06/145, International Monetary Fund. [Downloadable!]
  7. Wolf, Susanna, 2007. "Does Aid Improve Public Service Delivery?," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  8. Lennart Erickson & Carl-Johan Dalgaard, 2007. "Solow Versus Harrod-Domar: Reexamining the Aid Costs of the First Millennium Development Goal," IMF Working Papers 06/284, International Monetary Fund. [Downloadable!]
  9. Armah, Stephen & Nelson, Carl H., 2008. "Is Foreign Aid Beneficial for Sub-Saharan Africa? A Panel Data Analysis," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6356, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  10. Susanna Wolf, 2007. "Does Aid Improve Public Service Delivery?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(4), pages 650-672, December. [Downloadable!] (restricted)
  11. John Hudson & Paul Mosley, 2007. "Aid Volatility, Policy and Development," Working Papers 2007015, The University of Sheffield, Department of Economics, revised Oct 2007. [Downloadable!]
    Other versions:
  12. Mechler, Reinhard, 2009. "Disasters and economic welfare : can national savings help explain post-disaster changes in consumption ?," Policy Research Working Paper Series 4988, The World Bank. [Downloadable!]
  13. Aiyar, Shekhar & Berg, Andrew & Hussain, Mumtaz, 2008. "The Macroeconomic Management of Increased Aid: Policy Lessons from Recent Experience," Working Papers RP2008/79, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
    Other versions:
  14. Guillaumont, Patrick & Guillaumont Jeanneney, Sylviane, 2007. "Big Push versus Absorptive Capacity: How to Reconcile the Two Approaches," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
    Other versions:
  15. Degol Hailu, 2007. "Scaling-up HIV/AIDS Financing and the Role of Macroeconomic Policies in Kenya," Conference Paper 4, International Policy Centre for Inclusive Growth. [Downloadable!]
  16. John Serieux, 2007. "Managing the Exchange Rate Consequences of an MDG-Related Scale-up in HIV/AIDS Financing," Conference Paper 1, International Policy Centre for Inclusive Growth. [Downloadable!]
  17. Peter Rangazas & Alex Mourmouras, 2006. "Foreign Aid Policy and Sources of Poverty: A Quantitative Framework," IMF Working Papers 06/14, International Monetary Fund. [Downloadable!]
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