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Business Cycle Fluctuations, Large Shocks, and Development Aid

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  • Era Dabla-Norris
  • Camelia Minoiu
  • Luis-Felipe Zanna

Abstract

We examine the cyclical properties of development aid using bilateral data for 22 donors and over 100 recipients during 1970?2005. We find that bilateral aid flows are on average procyclical with respect to business cycles in donor and recipient countries. However, they become countercyclical when recipient countries face large adverse shocks to the terms-of-trade or growth collapses-thus playing an important cushioning role. Aid outlays contract sharply during severe donor economic downturns; this effect is magnified by higher public debt levels. Additionally, bilateral aid flows are higher in the presence of IMF programs and are more countercyclical for recipient countries with stronger institutions.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/240.

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Length: 39
Date of creation: 01 Oct 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/240

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Keywords: Aid flows; Developed countries; Developing countries; Economic growth; Economic models; External shocks; Fund; Terms of trade; bilateral aid; foreign aid; development aid; dynamic effects; aid allocation; bilateral trade; world economy; foreign aid policy; bilateral flows; trade theories; terms of trade shocks; humanitarian aid; commodity prices; political economy; export price; trade flows; trade shocks; bilateral trade data; international aid; export prices; balance trade; aggregate volatility; trade data; economic cooperation; aid effectiveness; trade shock; exchange rate regimes;

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Citations

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Cited by:
  1. International Monetary Fund, 2012. "Are Foreign Aid and Remittance Inflows a Hedge Against Food Price Shocks?," IMF Working Papers 12/67, International Monetary Fund.
  2. Peter Claeys & Luis Costa, 2012. "“A Note on the Relationship Between the Cyclicality of Markups and Fiscal Policy”," AQR Working Papers, University of Barcelona, Regional Quantitative Analysis Group 201208, University of Barcelona, Regional Quantitative Analysis Group, revised Sep 2012.
  3. Jean-Louis Combes & Christian Ebeke & Mireille Ntsama Etoundi & Thierry Yogo, 2012. "Are Foreign Aid and Remittances a Hedge against Food Price Shocks in Developing Countries?," Working Papers, HAL halshs-00608128, HAL.
  4. Das, Debasish Kumar & Dutta, Champa Bati, 2012. "Global financial crisis and foreign development assistance shocks in least developing countries," MPRA Paper 40281, University Library of Munich, Germany.
  5. Andrea Filippo Presbitero, 2013. "Aid and Vulnerability," Mo.Fi.R. Working Papers, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences 88, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  6. Gravier-Rymaszewska, Joanna, 2012. "How Aid Supply Responds to Economic Crises: A Panel VAR Approach," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).

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