Local Financial Development and the Aid-Growth Relationship

Mwanza Nkusu and Selin Sayek

No 2004/238, IMF Working Papers from International Monetary Fund

Abstract: With official development assistance (ODA) set to rise as countries strive to meet the Millennium Development Goals (MDGs), aid effectiveness remains an important area of development policy. An increasing number of studies support the notion that ODA can contribute to growth in a nonlinear relationship. In this paper, we investigate a new hypothesis regarding this relationship: that deeper financial markets in aid-recipient countries facilitate the management of aid flows, thereby enhancing aid effectiveness. An empirical analysis, using a panel data set, finds robust support for the hypothesis.

Keywords: WP; financial market; financial market depth; interaction term; Foreign aid; economic growth; poverty; financial development; depth indicator; financial market development; depth measure; Aid flows; Financial sector development; Real exchange rates; Development assistance; Sub-Saharan Africa (search for similar items in EconPapers)
Pages: 34
Date: 2004-12-01
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Citations: View citations in EconPapers (13)

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