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Macroeconomic effects of foreign aid and remittances: Implications for aid effectiveness studies

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  • Annen, Kurt
  • Batu, Michael
  • Kosempel, Stephen

Abstract

In this paper we quantify the impact of wealth transfers such as remittances and foreign aid using a DSGE-RBC model. We calibrate and simulate the model using data from 85 recipient countries. We show that positive wealth transfer shocks have a lagged positive response on output provided that persistence is sufficiently low, but these effects are small in comparison to other aggregate shocks. In fact, our calibration and simulation results suggest that wealth transfer shocks would need to be around nine times as large in order to produce the GDP volatility created by productivity shocks. The policy implications of our work primarily consist in providing guidance for research that tries to empirically estimate the aid–growth relationship.

Suggested Citation

  • Annen, Kurt & Batu, Michael & Kosempel, Stephen, 2016. "Macroeconomic effects of foreign aid and remittances: Implications for aid effectiveness studies," Journal of Policy Modeling, Elsevier, vol. 38(6), pages 1136-1146.
    • Handle: RePEc:eee:jpolmo:v:38:y:2016:i:6:p:1136-1146
    DOI: 10.1016/j.jpolmod.2016.10.003
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    Cited by:

    1. Jude Eggoh & Chrysost Bangake & Gervasio Semedo, 2019. "Do remittances spur economic growth? Evidence from developing countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 28(4), pages 391-418, May.
    2. Batu, Michael, 2017. "International worker remittances and economic growth in a Real Business Cycle framework," Structural Change and Economic Dynamics, Elsevier, vol. 40(C), pages 81-91.
    3. Opperman, Pieter & Adjasi, Charles Komla Delali, 2019. "Remittance volatility and financial sector development in sub-Saharan African countries," Journal of Policy Modeling, Elsevier, vol. 41(2), pages 336-351.
    4. Chrysost Bangake & Jude Eggoh, 2020. "Financial Development Thresholds and the Remittances-Growth Nexus," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 18(2), pages 425-445, June.
    5. Robert Stojanov & Daniel Němec & Libor Žídek, 2019. "Evaluation of the Long-Term Stability and Impact of Remittances and Development Aid on Sustainable Economic Growth in Developing Countries," Sustainability, MDPI, vol. 11(6), pages 1-18, March.
    6. Khraiche, Maroula & Boudreau, James, 2020. "Can lower remittance costs improve human capital accumulation in Africa?," Journal of Policy Modeling, Elsevier, vol. 42(5), pages 1000-1021.
    7. Kurt Annen & Stephen Kosempel, 2018. "Why Aid-to-GDP Ratios?," Working Papers 1801, University of Guelph, Department of Economics and Finance.
    8. Abbas, Syed Ali & Selvanathan, Eliyathamby A. & Selvanathan, Saroja & Bandaralage, Jayatilleke S., 2021. "Are remittances and foreign aid interlinked? Evidence from least developed and developing countries," Economic Modelling, Elsevier, vol. 94(C), pages 265-275.

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    More about this item

    Keywords

    Foreign aid; Remittances; Volatility; Growth;
    All these keywords.

    JEL classification:

    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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