The Short-Run Macroeconomic Impact of Foreign Aid to Small States: An Agnostic Time Series Analysis

Henrik Hansen and Derek Headey

Journal of Development Studies, 2010, vol. 46, issue 5, 877-896

Abstract: This paper investigates the short-run macroeconomic impact of aid in small developing countries (SDCs) by using a vector auto regression (VAR) model to study the impact of aid on net import (absorption) and domestic demand (spending). We focus on average country effects within two country sub-groups, and find substantial differences between 'aid-dependent' SDCs and other SDCs that are more dependent on natural resources, tourism or financial services. In aid-dependent SDCs, aid absorption more or less equals spending, although only half of the aid flow is absorbed and spent. In the non-aid-dependent group, aid does not seem to be absorbed or spent in any systematic fashion.

Date: 2010
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Related works:
Working Paper: The short-run macroeconomic impact of foreign aid to small states: An agnostic time series analysis (2009)
Working Paper: The Short-Run Macroeconomic Impact of Foreign Aid to Small States: An Agnostic Timeseries Analysis (2007)
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DOI: 10.1080/00220381003623848

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