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The impact of the Interaction between institutional quality and aid volatility on growth: theory and evidence

  • Kathavate, Jay
  • Mallik, Girijasankar
Registered author(s):

    We analyze both theoretically and empirically, the effect of aid volatility and its interaction effect with institutional quality on per capita economic growth. Our theoretical model, in which an aid-recipient government, operating in an institutional environment of some given quality (making choices over the distribution of aid), predicts that a negative effect of aid volatility on growth is mitigated by stronger institutional quality. We use panel data covering the period 1984–2004 for 78 countries to test this theoretical prediction. Using Generalised Methods of Moments (GMM) we find the relationship between growth and aid volatility is significantly negative and depends on institutional quality. Our baseline results are robust to various computations of aid volatility and foreign aid, time periods, sub-samples and additional covariates.

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    File URL: http://www.sciencedirect.com/science/article/pii/S026499931200034X
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    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 29 (2012)
    Issue (Month): 3 ()
    Pages: 716-724

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    Handle: RePEc:eee:ecmode:v:29:y:2012:i:3:p:716-724
    DOI: 10.1016/j.econmod.2012.01.020
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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