Foreign Aid and Domestic Absorption

Jonathan Temple and Nicolas Van de Sijpe

No 2014-01, CSAE Working Paper Series from Centre for the Study of African Economies, University of Oxford

Abstract: We introduce a new ‘supply-push’ instrument for foreign aid, to be used together with an instrumental variable estimator that filters out interactive fixed effects. We use this instrument to study the effects of aid on macroeconomic ratios, and especially the ratios of consumption, investment, imports and exports to GDP. We cannot reject the hypothesis that aid is fully absorbed rather than used to build foreign reserves or exiting as capital flight, nor do we find evidence of Dutch Disease effects. Aid increases consumption, and there is also some evidence that aid raises investment, but with a delayed effect.

Date: 2014
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Related works:
Journal Article: Foreign aid and domestic absorption (2017)
Working Paper: Foreign Aid and Domestic Absorption (2015)
Working Paper: Foreign Aid and Domestic Absorption (2014)
Working Paper: Foreign Aid and Domestic Absorption (2014)
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