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Does Pro-cyclical Aid Lead to Pro-cyclical Fiscal Policy? An Empirical Analysis for Sub-Saharan Africa

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  • Jean-Louis COMBES

    () (Centre d'Etudes et de Recherches sur le Développement International(CERDI))

  • Rasmané OUEDRAOGO

    ()

Abstract

This paper examines the so-popular anecdote according to which pro-cyclical fiscal policies are due to pro-cyclical behavior of financing. We address the question of whether or not pro-cyclical aid leads to pro-cyclical fiscal policies in SSA recipient countries. We employed panel data techniques covering 39 SSA countries over the period 1985- 2012. We found that results depend on the type of aid: pro-cyclical bilateral aid is negatively associated to pro-cyclical fiscal policy, while pro-cyclical ODA from multilateral agencies leads to more pro-cyclical fiscal policy. This finding is robust to potential error bias, alternative specifications, additional controls and different estimation methods.

Suggested Citation

  • Jean-Louis COMBES & Rasmané OUEDRAOGO, 2014. "Does Pro-cyclical Aid Lead to Pro-cyclical Fiscal Policy? An Empirical Analysis for Sub-Saharan Africa," Working Papers 201424, CERDI.
  • Handle: RePEc:cdi:wpaper:1634
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    Keywords

    Sub-Saharan Africa; Official development assistance; Fiscal policy; Pro-cyclicality;

    JEL classification:

    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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