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Does Aid Mitigate External Shocks?

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  • Paul Collier
  • Benedikt Goderis

Abstract

This paper investigates the role of aid in mitigating the adverse effects of commodity export price shocks on growth in commodity-dependent countries.� Using a large cross-country dataset, we find that negative shocks matter for short-term growth, while the ex ante risk of shocks does not seem to matter.� We also find that both the level of aid and the flexibility of the exchange rate substantially lower the adverse growth effect of shocks.� While the mitigating effect of aid is significant in both countries with pegs and countries with floats, the effect seems to be smaller for the latter, suggesting that aid and exchange rate flexibility are partly substitutes.� We investigate whether aid has historically been targeted at shock-prone countries, but find no evidence that this is the case.� This suggests that donors could increase aid effectiveness by redirecting aid towards countries with a high incidence of commodity export price shocks.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/2007-18.

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Date of creation: 01 Oct 2007
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Handle: RePEc:oxf:wpaper:wps/2007-18

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Keywords: Commodity Prices; Aid; Growth; External Shocks;

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References

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  1. Raddatz, Claudio, 2007. "Are external shocks responsible for the instability of output in low-income countries?," Journal of Development Economics, Elsevier, Elsevier, vol. 84(1), pages 155-187, September.
  2. Goderis, Benedikt & Ioannidou, Vasso P., 2008. "Do high interest rates defend currencies during speculative attacks New evidence," Journal of International Economics, Elsevier, Elsevier, vol. 74(1), pages 158-169, January.
  3. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, Elsevier, vol. 87(1), pages 115-143, August.
  4. Edward Miguel & Shanker Satyanath & Ernest Sergenti, 2004. "Economic Shocks and Civil Conflict: An Instrumental Variables Approach," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(4), pages 725-753, August.
  5. P. Guillaumont & L. Chauvet, 2001. "Aid and Performance: A Reassessment," Journal of Development Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(6), pages 66-92.
  6. Tavares, Jose, 2003. "Does foreign aid corrupt?," Economics Letters, Elsevier, Elsevier, vol. 79(1), pages 99-106, April.
  7. David Roodman, 2003. "XTABOND2: Stata module to extend xtabond dynamic panel data estimator," Statistical Software Components S435901, Boston College Department of Economics, revised 28 Jul 2014.
  8. Paul Collier & Benedikt Goderis, 2007. "Commodity Prices, Growth, and the Natural Resource Curse: Reconciling a Conundrum," Economics Series Working Papers WPS/2007-15, University of Oxford, Department of Economics.
  9. Dehn, Jan, 2000. "Commodity price uncertainty in developing countries," Policy Research Working Paper Series 2426, The World Bank.
  10. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, American Economic Association, vol. 90(4), pages 847-868, September.
  11. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, StataCorp LP, vol. 9(1), pages 86-136, March.
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  13. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  14. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  15. Jan Dehn, 2000. "Commodity price uncertainty in developing countries," CSAE Working Paper Series 2000-12, Centre for the Study of African Economies, University of Oxford.
  16. Jan Dehn, 2000. "Commodity Price Uncertainty in Developing Countries," Economics Series Working Papers WPS/2000-12, University of Oxford, Department of Economics.
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Citations

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Cited by:
  1. Era Dabla-Norris & Camelia Minoiu & Luis-Felipe Zanna, 2010. "Business Cycle Fluctuations, Large Shocks, and Development Aid," IMF Working Papers 10/240, International Monetary Fund.
  2. Sergio Tezanos Vázquez, 2009. "Geopolítica de la ayuda ¿Cómo optimizar el impacto de la ayuda sobre el crecimiento?," Documentos de trabajo sobre cooperación y desarrollo, Cátedra de Cooperación Internacional y con Iberoamérica (COIBA), Universidad de Cantabria 200903, Cátedra de Cooperación Internacional y con Iberoamérica (COIBA), Universidad de Cantabria.
  3. Paul Collier & Benedikt Goderis, 2009. "Structural policies for shock-prone developing countries," Oxford Economic Papers, Oxford University Press, vol. 61(4), pages 703-726, October.
  4. Guillaumont, Patrick & Wagner, Laurent, 2012. "Aid and Growth Accelerations: Vulnerability Matters," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  5. Lars M. Johansson & Jan Pettersson, 2008. "Tied Aid, Trade-Facilitating Aid or Trade-Diverting Aid?," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c013_008, DEGIT, Dynamics, Economic Growth, and International Trade.
  6. Thierry Kangoye, 2008. "Instability from trade and democracy: the long-run effect of aid," Post-Print, HAL hal-00331902, HAL.
  7. Patrick GUILLAUMONT & Laurent WAGNER, 2014. "Aid effectiveness for poverty reduction: lessons from cross-country analyses, with a special focus on vulnerable countries," Working Papers, FERDI P96, FERDI.
  8. Thierry Kangoye, 2008. "Instability from trade and democracy: the long-run effect of aid," Economics Bulletin, AccessEcon, vol. 6(41), pages 1-16.
  9. Sergio Tezanos Vázquez & Rogelio Madrueño Aguilar & Marta Guijarro Garví, 2009. "Impacto de la ayuda sobre el crecimiento económico. El caso de América Latina y el Caribe," Documentos de trabajo sobre cooperación y desarrollo, Cátedra de Cooperación Internacional y con Iberoamérica (COIBA), Universidad de Cantabria 200904, Cátedra de Cooperación Internacional y con Iberoamérica (COIBA), Universidad de Cantabria.
  10. Sergio Tezanos Vázquez, 2010. "Ayuda y crecimiento: una relación en disputa," Documentos de trabajo sobre cooperación y desarrollo, Cátedra de Cooperación Internacional y con Iberoamérica (COIBA), Universidad de Cantabria 201001, Cátedra de Cooperación Internacional y con Iberoamérica (COIBA), Universidad de Cantabria.

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