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Aid Eff ectiveness: New Instrument, New Results?

Emmanuel Frot () and Maria Perrotta ()
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Maria Perrotta: Stockholm Institute of Transition Economics, Postal: Stockholm Institute of Transition Economics, Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Authors registered in the RePEc Author Service: Maria Perrotta Berlin ()

No 11, SITE Working Paper Series from Stockholm School of Economics, Stockholm Institute of Transition Economics

Abstract: Despite a voluminous literature on the topic, the question of whether foreign aid leads to growth is still controversial. To observe the pure effect of aid, researchers used instruments that must be exogenous to growth and explain well aid flows. This paper argues that instruments used in the past do not satisfy these conditions. We propose a new instrument based on predicted aid quantity and argue that it is a significant improvement relative to past approaches. We find a significant and relatively big effect of aid: a one standard deviation increase in received aid is associated with a 1.6 percentage points higher growth rate.

Keywords: Foreign aid; growth; instrumental variables; GMM (search for similar items in EconPapers)
JEL-codes: F35 O11 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2009-05-28
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