The Potential of Foreign Aid as Insurance

Stephane Pallage, Michel A. Robe and Catherine Bérubé
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Michel A. Robe: International Monetary Fund
Catherine Bérubé: International Monetary Fund

IMF Staff Papers, 2006, vol. 53, issue 3, pages 5

Abstract: This paper quantifies the potential of foreign aid as an insurance mechanism against macroeconomic shocks. Within a dynamic model of aid flows between two endowment economies, we show that at least three-fourths of the large welfare costs of macroeconomic fluctuations in poor countries could be alleviated by a simple reallocation of aid flows across time. In developing countries subject to persistent macroeconomic shocks, the resulting welfare improvement is of first-order magnitude. Copyright 2006, International Monetary Fund

JEL-codes: F35 E32 E60 (search for similar items in EconPapers)
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