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The Allocation of volatile aid and economic growth: Evidence and a suggestive theory

Kyriakos Neanidis and Dimitrios Varvarigos ()
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Dimitrios Varvarigos: Dept of Economics, Loughborough University

Discussion Paper Series from Department of Economics, Loughborough University

Abstract: We present evidence on the effects of aid transfers and their degree of volatility on economic growth and show that these effects can be categorised in relation to the allocation of foreign aid between productive and non-productive purposes. Using a stochastic endogenous growth model, we provide a theoretical rationalisation for our empirical evidence. Both the empirical and the theoretical analyses generate a pertinent conclusion: situations in which aid actually inhibits the recipient’s growth rate may appear if and only if aid is volatile. As a result, we conclude that it is only in conjunction with the presence of aid variability that aid allocation decisions determine whether aid hurts or promotes trend growth.

Keywords: Foreign aid; Growth (search for similar items in EconPapers)
JEL-codes: F35 O41 O47 (search for similar items in EconPapers)
Date: 2007-03, Revised 2007-03
New Economics Papers: this item is included in nep-fdg
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Citations: View citations in EconPapers (3)

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