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Does Aid Mitigate Shocks?

  • Paul Collier
  • Benedikt Goderis

This paper investigates the role of aid in mitigating the adverse effects of commodity export price shocks on growth in commodity-dependent countries. Using a large cross-country dataset, we find that negative shocks matter for short-term growth, while the ex ante risk of shocks does not seem to matter. We also find that both the level of aid and the flexibillity of the exchange rate substantially lower the adverse growth effect of shocks. While the mitigating effect of aid is significant in both countries with pegs and countries with floats, the effect seems to be smaller for the latter, suggesting that aid and exchage rate flexibility are partly substitutes. We investigate whether aid has historically been targeted at shock-prone countries, but find no evidence that this is the case. This suggests that donors could increase aid effectiveness by redirecting aid towards countries with a high incidence of commodity export price shocks.

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Paper provided by Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford in its series OxCarre Working Papers with number 006.

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Date of creation: 2008
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Handle: RePEc:oxf:oxcrwp:006
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  1. Goderis, Benedikt & Ioannidou, Vasso P., 2008. "Do high interest rates defend currencies during speculative attacks New evidence," Journal of International Economics, Elsevier, vol. 74(1), pages 158-169, January.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 1-48, February.
  3. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  4. Paul Collier & Benedikt Goderis, 2007. "Commodity Prices, Growth, and the Natural Resource Curse: Reconciling a Conundrum," Economics Series Working Papers WPS/2007-15, University of Oxford, Department of Economics.
  5. Patrick GUILLAUMONT & Lisa CHAUVET, 1999. "Aid and Performance: A Reassessment," Working Papers 199910, CERDI.
  6. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  7. Raddatz, Claudio, 2005. "Are external shocks responsible for the instability of output in low income countries?," Policy Research Working Paper Series 3680, The World Bank.
  8. Tavares, Jose, 2003. "Does foreign aid corrupt?," Economics Letters, Elsevier, vol. 79(1), pages 99-106, April.
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