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The Short-Run Macroeconomic Impact of Foreign Aid to Small States: An Agnostic Timeseries Analysis

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  • Hansen, Henrik
  • Headey, Derek

Abstract

This study econometrically evaluates the short-run impact of aid in small developing countries (SDCs) by applying a VAR model to study aid's impact on 'absorption' (increasing import demand) and 'spending' (increased domestic demand) across countries. Whilst our approach allows parameters to vary across countries, the focus is on average country effects and differential effects within certain subgroups of countries. In particular, we find substantial differences between 'aid-dependent' SDCs and other SDCs which are more dependent on mineral resources and financial services. In the latter group, aid seems to be neither absorbed nor spent in any systematic fashion. But in the aid-dependent SDCs, aid receipts seem to be used more in the textbook 'absorb and spend' fashion.

Suggested Citation

  • Hansen, Henrik & Headey, Derek, 2007. "The Short-Run Macroeconomic Impact of Foreign Aid to Small States: An Agnostic Timeseries Analysis," WIDER Working Paper Series 038, World Institute for Development Economic Research (UNU-WIDER).
  • Handle: RePEc:unu:wpaper:rp2007-38
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    References listed on IDEAS

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    Cited by:

    1. Qayyum, Unbreen & Din, Musleh-ud & Haider, Adnan, 2014. "Foreign aid, external debt and governance," Economic Modelling, Elsevier, vol. 37(C), pages 41-52.
    2. Temple, Jonathan & Van de Sijpe, Nicolas, 2017. "Foreign aid and domestic absorption," Journal of International Economics, Elsevier, vol. 108(C), pages 431-443.
    3. Lof, Matthijs & Mekasha, Tseday Jemaneh & Tarp, Finn, 2015. "Aid and Income: Another Time-series Perspective," World Development, Elsevier, vol. 69(C), pages 19-30.
    4. Zoundi, Zakaria, 2015. "The Absorption and Spending Capacity of Aid in the Economic Community of West African States," MPRA Paper 66736, University Library of Munich, Germany, revised 23 Aug 2015.
    5. Gravier-Rymaszewska, Joanna, 2012. "How Aid Supply Responds to Economic Crises: A Panel VAR Approach," WIDER Working Paper Series 025, World Institute for Development Economic Research (UNU-WIDER).
    6. repec:eso:journl:v:47:y:2016:i:3:p:339-360 is not listed on IDEAS
    7. Alege P.O. & George E.O. & Ojeaga P.I. & Oluwatimiro Q., 2015. "Is Africa’s current growth reducing inequality? Evidence from some selected african countries," Computational Methods in Social Sciences (CMSS), "Nicolae Titulescu" University of Bucharest, Faculty of Economic Sciences, vol. 3(1), pages 49-67, June.
    8. Shonchoy, Abu, 2010. "The Dynamics of Spending and Absorption of Aid: Panel Data Analysis," MPRA Paper 24530, University Library of Munich, Germany.
    9. Robert Gillanders, 2016. "The Effects of Foreign Aid in Sub-Saharan Africa," The Economic and Social Review, Economic and Social Studies, vol. 47(3), pages 339-360.

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