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Foreign Aid and Domestic Absorption

  • Jonathan R. W. Temple
  • Nicolas Van de Sijpe

We introduce a new ‘supply-push’ instrument for foreign aid, to be used together with an instrumental variable estimator that filters out interactive fixed effects. 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 increases consumption, and there is also some evidence that aid raises investment, but with a delayed effect.

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Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2014-01.

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Date of creation: 2014
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Handle: RePEc:csa:wpaper:2014-01
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