WELFARE GAINS OF AID INDEXATION IN SMALL OPEN ECONOMIES

Anubha Dhasmana

The Developing Economies, 2010, vol. 48, issue 2, 247-276

Abstract: Foreign‐aid flows to poor, aid‐dependent economies are highly volatile and pro‐cyclical. Shortfalls in aid coincide with shortfalls in GDP and government revenues. This increases the consumption volatility in aid dependent countries, thereby causing substantial welfare losses. This paper finds that indexing aid flows to exogenous shocks, like a change in the terms of trade, can significantly improve the welfare of an aid‐dependent country by lowering its output and consumption volatility. Compared to the benchmark specification with stochastic aid flows, indexation of aid flows to terms‐of‐trade shocks can reduce the cost of business‐cycle fluctuations in the recipient country by 4% of permanent consumption. Moreover, use of indexed aid can allow donors to reduce the aid flows by 3% without lowering the level of welfare in the recipient country.

Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://doi.org/10.1111/j.1746-1049.2010.00107.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:deveco:v:48:y:2010:i:2:p:247-276

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0012-1533

Access Statistics for this article

The Developing Economies is currently edited by Katsuji Nakagane

More articles in The Developing Economies from Institute of Developing Economies Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().