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Aid and fiscal policy in Nicaragua: A fiscal response analysis

Author

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  • Roberto Machado

    (Economic Commission for Latin America and the Caribbean, Subregional Headquarters for the Caribbean, Port of Spain, Trinidad and Tobago)

Abstract

This paper estimates a model of fiscal response to analyse the impact of aid on government consumption and investment, tax revenue and public borrowing in Nicaragua in 1966-2004. This country is an interesting case study since aid flows-i.e. grants and aid loans-averaged more than 8 per cent of GDP during the analysed period. Results for direct (structural) effects indicate that the impact of aid on government consumption are more significant than those on government investment, revealing a higher propensity to consume than to invest aid flows, presumably reflecting donors and government priorities to finance social spending. Results also show that aid crowds-out both tax revenue and public borrowing. Estimates for total (reduced-form) effects are hard to interpret, in some cases showing the opposite sign than expected or implausible magnitudes. Copyright © 2009 John Wiley & Sons, Ltd.

Suggested Citation

  • Roberto Machado, 2010. "Aid and fiscal policy in Nicaragua: A fiscal response analysis," Journal of International Development, John Wiley & Sons, Ltd., vol. 22(4), pages 483-502.
    • Handle: RePEc:wly:jintdv:v:22:y:2010:i:4:p:483-502
    DOI: 10.1002/jid.1584
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    References listed on IDEAS

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    1. Simon Feeny, 2006. "Policy preferences in fiscal response studies," Journal of International Development, John Wiley & Sons, Ltd., vol. 18(8), pages 1167-1175.
    2. Susana Franco‐Rodriguez, 2000. "Recent developments in fiscal response with an application to Costa Rica," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 429-441, April.
    3. Mark McGillivray & Oliver Morrissey, 2001. "Fiscal Effects of Aid," WIDER Working Paper Series DP2001-61, World Institute for Development Economic Research (UNU-WIDER).
    4. Mark McGillivray & Bazoumana Ouattara, 2005. "Aid, Debt Burden and Government Fiscal Behaviour in Côte d'Ivoire," Journal of African Economies, Centre for the Study of African Economies, vol. 14(2), pages 247-269, June.
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    1. repec:oup:jafrec:v:32:y:2022:i:1:p:26-51. is not listed on IDEAS

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