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The dynamic implications of foreign aid and its variability

Cristina Arellano, Ales Bulir (), Timothy Lane and Leslie Lipschitz

Journal of Development Economics, 2009, vol. 88, issue 1, 87-102

Abstract: The paper examines the effects of aid and its volatility on consumption, investment, and the structure of production in the context of an intertemporal two-sector general equilibrium model, calibrated using data for aid-dependent countries in Africa. A permanent flow of aid mainly finances consumption rather than investment--consistent with the historical failure of aid inflows to translate into sustained growth. Large aid flows are associated with higher real exchange rates and smaller tradable sectors because aid is a substitute for tradable consumption. Aid volatility results in substantial welfare losses, providing a motivation for recent discussions of aid architecture stressing the need for greater predictability of aid. These results are also consistent with evidence from cross-country regressions of manufactured exports, presented later in the paper.

Keywords: C68; F35; F41; Real; business; cycle; General; equilibrium; Aid; Transfer; problem (search for similar items in EconPapers)
Date: 2009
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Working Paper: The Dynamic Implications of Foreign Aid and Its Variability (2005) Downloads
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