Does foreign aid play a role in the maintenance of economic growth? A non-linear analysis

Nermeen Harb and Stephen Hall

The Quarterly Review of Economics and Finance, 2019, vol. 73, issue C, 192-204

Abstract: Should donors keep scaling up foreign aid or should they be more cautious because of the recipient country’s limited absorptive capacity? This paper investigates the non-linearity hypothesis between foreign aid and economic growth for 25 developing countries during the period from 1984 to 2008. By using state space system equations, we provide a new insight to estimating the Panel Smooth Transition Regression Model (PSTR). This method identifies the estimated coefficients at each point of time and determines endogenously an appropriate threshold level. For upper middle countries, we recognise the positive impact of aid flows on economic growth but with diminishing returns while lower middle and least developed countries support the big push concept.

Keywords: Foreign aid; Economic growth; Non-linear; PSTR model (search for similar items in EconPapers)
JEL-codes: C24 C32 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:73:y:2019:i:c:p:192-204

DOI: 10.1016/j.qref.2018.12.002

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