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Aid, Exports, and Growth: A Time-Series Perspective on the Dutch Disease Hypothesis

Joong Shik Kang, Alessandro Prati and Alessandro Rebucci ()

No 4678, Research Department Publications from Inter-American Development Bank, Research Department

Abstract: The available evidence on the effects of aid on growth is notoriously mixed. We use a novel empirical methodology, a heterogeneous panel vector-autoregression model identified through factor analysis, to study the dynamic response of exports, imports, and per capita GDP growth to a "global" aid shock (the common component of individual country aid-to-GDP ratios). We find that the estimated cumulative resposive of exports and per capita GDP growth to a global aid shock are strongly positively correlated, and both responses are inversely related to exchange rate overvaluation measures. We interpret this evidence as consistent with the Dutch disease hypothesis. However, we also find that, in countries with less overvalued real exchange rates, exports and per capita GDP growth respond positively to a global aid shock. This evidence suggests that preventing exchange rate overvaluations may allow aid-receiving countries to avoid the Dutch disease.

Keywords: Aid; Common factors; Dutch Disease; Growth Panel VARs; Exchange rate overvaluation (search for similar items in EconPapers)
JEL-codes: F35 F43 O11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-opm
Date: 2010-08
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Related works:
Working Paper: Aid, Exports, and Growth; A Time-Series Perspective on the Dutch Disease Hypothesis (2013) Downloads
Journal Article: Aid, Exports, and Growth: a Time-Series Perspective on the Dutch Disease Hypothesis (2012) Downloads
Working Paper: Aid, Exports, and Growth: A Time-Series Perspective on the Dutch Disease Hypothesis (2011) Downloads
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