Measuring the Effect of Foreign Aidon Growth and Poverty Reduction or the Pitfalls of Interaction Variables

Author/Editor:

J. J. Polak ; Joydeep Roy ; Catherine A Pattillo

Publication Date:

June 1, 2007

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Regressions in a number of recent papers written by staff members of the World Bank and the IMF rely on an interaction variable (IAV) to establish the effects of foreign aid on economic growth or the reduction of poverty. The common assumption in these papers is that if the coefficient of this IAV is statistically significant, then both of its components have a significant effect on the dependent variable. That assumption is not justified in its generality, and this paper develops two techniques that show a high probability that in at least two of the three studies analyzed one of the components of the IAV may not have a significant effect.

Series:

Working Paper No. 2007/145

Subject:

Foreign aid Labor Poverty Poverty reduction Public expenditure review

English

Publication Date:

June 1, 2007

ISBN/ISSN:

9781451867091/1018-5941

Stock No:

WPIEA2007145

Pages:

13

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