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Foreign Aid and the Business Cycle

We document the real business cycle properties of foreign aid to poor countries. We show that aid exhibits the following empirical regularities over a twenty-five year period. First, it represents a significant source of income for the recipients. Second, it is very volatile - two to three times as volatile as output. Third, for the vast majority of recipient countries in our sample, aid disbursements are procyclical. Whatever the intended purpose of aid, this procyclicality suggests that aid ends up acting as a reward (punishment) for good (bad) economic performance. In contrast, there is no clear pattern of procyclicality with the business cycle of the donors. Nous documentons les propriétés cycliques de l'aide aux pays pauvres. Sur une période de vingt-cinq ans, nous identifions les régularités empiriques suivantes. Tout d'abord, l'aide constitue une source importante de revenu pour les pays receveurs. Deuxièmement, l'aide est très volatile - deux à trois fois plus volatile que le produit national. Troisièmement, les débours d'aide sont procycliques pour la grande majorité des pays de notre échantillon. Quel que soit le but véritable de l'aide, sa procyclicalité suggère qu'en définitive elle agit comme une récompense (une punition) pour bonne (mauvaise) performance économique. En ce qui concerne le cycle économique du donneur, la même procyclicalité de l'aide n'est pas observée.

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Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 63.

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Length: 24 pages
Date of creation: Jun 1998
Date of revision:
Publication status: published in Review of International Economics, 9(4), pp. 637-668, November 2001 (version differs from working paper)
Handle: RePEc:cre:crefwp:63
Contact details of provider: Postal: P.O. Box 8888, Downtown Station, Montreal (Canada) Quebec, H3C 3P8
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  1. Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-89, July.
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  8. David K. Backus & Patrick J. Kehoe, 1992. "International Evidence on the Historical Properties of Business Cycles," Working Papers 92-5, New York University, Leonard N. Stern School of Business, Department of Economics.
  9. Steve Ambler & Emanuela Cardia & Christian Zimmermann, 1999. "International Business Cycles: What are the Facts?," Cahiers de recherche CREFE / CREFE Working Papers 90, CREFE, Université du Québec à Montréal.
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  12. Marcet, Albert & Marimon, Ramon, 1992. "Communication, commitment, and growth," Journal of Economic Theory, Elsevier, vol. 58(2), pages 219-249, December.
  13. Easterly, William, 1999. "The ghost of financing gap: testing the growth model used in the international financial institutions," Journal of Development Economics, Elsevier, vol. 60(2), pages 423-438, December.
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  15. Easterly, William, 1997. "The ghost of financing gap : how the Harrod-Domar growth model still haunts development economics," Policy Research Working Paper Series 1807, The World Bank.
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  18. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
  19. Alberto Alesina & David Dollar, 1998. "Who Gives Foreign Aid to Whom and Why?," NBER Working Papers 6612, National Bureau of Economic Research, Inc.
  20. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  21. Hansen, Henrik & Tarp, Finn, 2000. "Aid and Growth Regressions," MPRA Paper 62288, University Library of Munich, Germany.
  22. Cooley, Thomas F. & Ohanian, Lee E., 1991. "The cyclical behavior of prices," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 25-60, August.
  23. Charles C. Chang & Eduardo Fernández-Arias & Luis Serven, 1998. "Measuring Aid Flows: A New Approach," Research Department Publications 4146, Inter-American Development Bank, Research Department.
  24. Michael A. Kouparitsas, 1996. "North-South business cycles," Working Paper Series, Macroeconomic Issues WP-96-9, Federal Reserve Bank of Chicago.
  25. Lane, Philip R., 1999. "Do International Investment Income Flows Smooth Income?," CEPR Discussion Papers 2123, C.E.P.R. Discussion Papers.
  26. Eswar Prasad & Bankim Chadha, 1992. "Are Prices Countercyclical?," IMF Working Papers 92/88, International Monetary Fund.
  27. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-37, February.
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