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Aid, Exports, and Growth: A Time-Series Perspective on the Dutch Disease Hypothesis

  • Joong Shik Kang
  • Alessandro Prati
  • Alessandro Rebucci

    ()

The available evidence on the effects of aid on growth is notoriously mixed. We use a novel empirical methodology, a heterogeneous panel vector-autoregression model identified through factor analysis, to study the dynamic response of exports, imports, and per capita GDP growth to a "global" aid shock (the common component of individual country aid-to-GDP ratios). We find that the estimated cumulative resposive of exports and per capita GDP growth to a global aid shock are strongly positively correlated, and both responses are inversely related to exchange rate overvaluation measures. We interpret this evidence as consistent with the Dutch disease hypothesis. However, we also find that, in countries with less overvalued real exchange rates, exports and per capita GDP growth respond positively to a global aid shock. This evidence suggests that preventing exchange rate overvaluations may allow aid-receiving countries to avoid the Dutch disease.

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Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4678.

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Date of creation: Aug 2010
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Handle: RePEc:idb:wpaper:4678
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  1. Raghuram G. Rajan & Arvind Subramanian, 2014. "Aid, Dutch Disease, and Manufacturing Growth," Working Papers id:6192, eSocialSciences.
  2. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
  3. Raghuram G. Rajan, 2005. "Aid and Growth: What Does The Cross-Country Evidence Really Show?," Working Papers id:54, eSocialSciences.
  4. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages F191-F216, 06.
  5. Jones, Charles I, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 495-525, May.
  6. Kevin Lee & M. Hashem Pesaran & Ron Smith, 1998. "Growth Empirics: A Panel Data Approach- A Comment," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 319-323, February.
  7. Thierry Tressel & Alessandro Prati, 2006. "Aid Volatility and Dutch Disease; Is there a Role for Macroeconomic Policies?," IMF Working Papers 06/145, International Monetary Fund.
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