IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

The Short-Run Macroeconomic Impact of Foreign Aid to Small States: An Agnostic Time Series Analysis

  • Henrik Hansen
  • Derek Headey

This paper investigates the short-run macroeconomic impact of aid in small developing countries (SDCs) by using a vector auto regression (VAR) model to study the impact of aid on net import (absorption) and domestic demand (spending). We focus on average country effects within two country sub-groups, and find substantial differences between 'aid-dependent' SDCs and other SDCs that are more dependent on natural resources, tourism or financial services. In aid-dependent SDCs, aid absorption more or less equals spending, although only half of the aid flow is absorbed and spent. In the non-aid-dependent group, aid does not seem to be absorbed or spent in any systematic fashion.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Taylor & Francis Journals in its journal Journal of Development Studies.

Volume (Year): 46 (2010)
Issue (Month): 5 ()
Pages: 877-896

in new window

Handle: RePEc:taf:jdevst:v:46:y:2010:i:5:p:877-896
Contact details of provider: Web page:

Order Information: Web:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Tony Killick & Mick Foster, 2007. "The Macroeconomics of Doubling Aid to Africa and the Centrality of the Supply Side," Development Policy Review, Overseas Development Institute, vol. 25(2), pages 167-192, 03.
  2. H Armstrong, R de Kervenoael, Xiao-Ming Li and R Read, . "A Comparision of the economic performance of different micro-states and between micro-states and larger countries," Working Papers ec9/97, Department of Economics, University of Lancaster.
  3. Kajal Lahiri, 2005. "Analysis of Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(4), pages 1093-1095.
  4. Robert Osei & Oliver Morrissey & Tim Lloyd, 2005. "The fiscal effects of aid in Ghana," Journal of International Development, John Wiley & Sons, Ltd., vol. 17(8), pages 1037-1053.
  5. Peter S. Heller & Sanjeev Gupta, 2002. "Challenges in Expanding Development Assistance," IMF Policy Discussion Papers 02/5, International Monetary Fund.
  6. Michel A. Robe & Stephane Pallage, 2000. "Foreign Aid And The Business Cycle," Computing in Economics and Finance 2000 107, Society for Computational Economics.
  7. Streeten, Paul, 1993. "The special problems of small countries," World Development, Elsevier, vol. 21(2), pages 197-202, February.
  8. Milner, Chris & Westaway, Tony, 1993. "Country size and the medium-term growth process: Some cross-country evidence," World Development, Elsevier, vol. 21(2), pages 203-211, February.
  9. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
  10. Andrew Berg & Mumtaz Hussain & Shaun K. Roache & Amber Mahone & Tokhir N. Mirzoev & Shekhar Aiyar, 2007. "The Macroeconomics of Scaling Up Aid: Lessons from Recent Experience," IMF Occasional Papers 253, International Monetary Fund.
  11. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
  12. Bulír, Ales & Hamann, A. Javier, 2008. "Volatility of Development Aid: From the Frying Pan into the Fire?," World Development, Elsevier, vol. 36(10), pages 2048-2066, October.
  13. Ale Bulir & A. Javier Hamann, 2003. "Aid Volatility: An Empirical Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 4.
  14. Easterly, William & Kraay, Aart, 2000. "Small States, Small Problems? Income, Growth, and Volatility in Small States," World Development, Elsevier, vol. 28(11), pages 2013-2027, November.
  15. Harvey W. Armstrong & Robert Read, 2002. "The phantom of liberty?: economic growth and the vulnerability of small states," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(4), pages 435-458.
  16. Shekhar Aiyar & Ummul Hasanath Ruthbah, 2008. "Where Did All the Aid Go? An Empirical Analysis of Absorption and Spending," IMF Working Papers 08/34, International Monetary Fund.
  17. Briguglio, Lino, 1995. "Small island developing states and their economic vulnerabilities," World Development, Elsevier, vol. 23(9), pages 1615-1632, September.
  18. Barten, A. P., 1969. "Maximum likelihood estimation of a complete system of demand equations," European Economic Review, Elsevier, vol. 1(1), pages 7-73.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:taf:jdevst:v:46:y:2010:i:5:p:877-896. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.