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Foreign Aid and Domestic Absorption

Listed author(s):
  • Jonathan Temple
  • Nicolas Van de Sijpe

This paper introduces a new ‘supply-push’ instrument for foreign aid, to be used together with an instrumental variable estimator that filters out unobserved common factors. We use this instrument to study the effects of aid on macroeconomic ratios, and especially the ratios of consumption, investment, imports and exports to GDP. We cannot reject the hypothesis that aid is fully absorbed rather than used to build foreign reserves or exiting as capital flight, nor do we find evidence of Dutch Disease effects. Aid leads to higher consumption, while the evidence that it promotes investment is less robust.

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File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp15658.pdf
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Paper provided by Department of Economics, University of Bristol, UK in its series Bristol Economics Discussion Papers with number 15/658.

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Length: 47 pages
Date of creation: 19 May 2015
Date of revision: 22 May 2015
Handle: RePEc:bri:uobdis:15/658
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