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Aid, Real Exchange Rate Misalignment, and Economic Growth in Sub-Saharan Africa

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  • Elbadawi, Ibrahim A.
  • Kaltani, Linda
  • Soto, Raimundo

Abstract

Generating sustained growth in Sub-Saharan Africa (SSA) is one of the most pressing challenges in global development. As the region clearly needs assistance to jump start its development, foreign aid becomes crucial. This paper investigates the nexus between foreign aid, exchange rate misalignment, and economic growth in SSA. Contrary to conventional wisdom, we do not find aid to be a major contributor to exchange rate overvaluation. In addition, we found that aid fosters growth but its impact is weaker in countries with overvalued exchange rates. Furthermore, we found that overvaluation reduces growth but its negative effect is ameliorated by financial development.

Suggested Citation

  • Elbadawi, Ibrahim A. & Kaltani, Linda & Soto, Raimundo, 2012. "Aid, Real Exchange Rate Misalignment, and Economic Growth in Sub-Saharan Africa," World Development, Elsevier, vol. 40(4), pages 681-700.
    • Handle: RePEc:eee:wdevel:v:40:y:2012:i:4:p:681-700
    DOI: 10.1016/j.worlddev.2011.09.012
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