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Does Aid Mitigate External Shocks?

  • Collier, Paul
  • Goderis, Benedikt

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 flexibility 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 exchange 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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File URL: http://www.wider.unu.edu/stc/repec/pdfs/rp2008/dp2008-06.pdf
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Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Paper Series with number DP2008/06.

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Length: 28 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:unu:wpaper:dp2008-06
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  1. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  2. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  3. 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.
  4. Raddatz, Claudio, 2007. "Are external shocks responsible for the instability of output in low-income countries?," Journal of Development Economics, Elsevier, vol. 84(1), pages 155-187, September.
  5. Jan Dehn, 2000. "Commodity Price Uncertainty in Developing Countries," Economics Series Working Papers WPS/2000-12, University of Oxford, Department of Economics.
  6. Dehn, Jan, 2000. "Commodity price uncertainty in developing countries," Policy Research Working Paper Series 2426, The World Bank.
  7. Patrick GUILLAUMONT & Lisa CHAUVET, 1999. "Aid and Performance: A Reassessment," Working Papers 199910, CERDI.
  8. David Roodman, 2003. "XTABOND2: Stata module to extend xtabond dynamic panel data estimator," Statistical Software Components S435901, Boston College Department of Economics, revised 07 May 2015.
  9. Benedikt Goderis & Vasso P. Ioannidou, 2006. "Do High Interest Rates Defend Currencies During Speculative Attacks? New Evidence," Economics Series Working Papers WPS/2006-11, University of Oxford, Department of Economics.
  10. David Roodman, 2006. "How to Do xtabond2," North American Stata Users' Group Meetings 2006 8, Stata Users Group.
  11. 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.
  12. Paul Collier & Benedikt Goderis, 2007. "Commodity Prices, Growth, and the Natural Resource Curse: Reconciling a Conundrum," CSAE Working Paper Series 2007-15, Centre for the Study of African Economies, University of Oxford.
  13. Edward Miguel & Shanker Satyanath & Ernest Sergenti, 2004. "Economic Shocks and Civil Conflict: An Instrumental Variables Approach," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 725-753, August.
  14. Jan Dehn, 2000. "Commodity price uncertainty in developing countries," CSAE Working Paper Series 2000-12, Centre for the Study of African Economies, University of Oxford.
  15. Tavares, Jose, 2003. "Does foreign aid corrupt?," Economics Letters, Elsevier, vol. 79(1), pages 99-106, April.
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