Where Did All the Aid Go? An Empirical Analysis of Absorption and Spending

Author/Editor:

Shekhar Aiyar ; Ummul Hasanath Ruthbah

Publication Date:

February 1, 2008

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

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:

This paper examines the macroeconomic usage of aid using panel data for a broad sample of aid-recipients. By definition an increase in aid must go toward a reduction in the current account balance (absorbed aid), an increase in capital outflows, or reserve accumulation. It is found that short-run absorption is typically very low, with much aid exiting through the capital account. Moreover, aid spending, defined in terms of the increase in government fiscal expenditures as a result of aid, is significantly greater than aid absorption, implying that aid systematically leads to an injection of domestic liquidity in recipient economies. The evidence here may help illuminate the rather weak link between aid and growth found in the literature. It reinforces the case for greater coordination between fiscal and monetary authorities in response to aid inflows.

Series:

Working Paper No. 08/34

Subject:

English

Publication Date:

February 1, 2008

ISBN/ISSN:

9781451868968/1018-5941

Stock No:

WPIEA2008034

Format:

Paper

Pages:

34

Please address any questions about this title to publications@imf.org