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The Potential of Foreign Aid as Insurance

  • Stéphane Pallage

    (International Monetary Fund)

  • Michel A. Robe

    (International Monetary Fund)

  • Catherine Bérubé

    (International Monetary Fund)

This paper quantifies the potential of foreign aid as an insurance mechanism against macroeconomic shocks. Within a dynamic model of aid flows between two endowment economies, we show that at least three-fourths of the large welfare costs of macroeconomic fluctuations in poor countries could be alleviated by a simple reallocation of aid flows across time. In developing countries subject to persistent macroeconomic shocks, the resulting welfare improvement is of first-order magnitude. Copyright 2006, International Monetary Fund

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Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 53 (2006)
Issue (Month): 3 ()
Pages: 5

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Handle: RePEc:pal:imfstp:v:53:y:2006:i:3:p:5
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