Local Financial Development and the Aid-Growth Relationship

December 1, 2004

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

With official development assistance (ODA) set to rise as countries strive to meet the Millennium Development Goals (MDGs), aid effectiveness remains an important area of development policy. An increasing number of studies support the notion that ODA can contribute to growth in a nonlinear relationship. In this paper, we investigate a new hypothesis regarding this relationship: that deeper financial markets in aid-recipient countries facilitate the management of aid flows, thereby enhancing aid effectiveness. An empirical analysis, using a panel data set, finds robust support for the hypothesis.

Subject: Aid flows, Development assistance, Financial markets, Financial sector development, Foreign aid, Foreign exchange, Real exchange rates

Keywords: Aid flows, depth indicator, depth measure, Development assistance, economic growth, financial development, financial market, financial market depth, financial market development, Financial sector development, Foreign aid, interaction term, poverty, Real exchange rates, Sub-Saharan Africa, WP

Pages:
34
Volume:
2004
DOI:
https://doi.org/10.5089/9781451875775.001
Issue:
238
Series:
Working Paper No. 2004/238
Stock No:
WPIEA2382004
ISBN:
9781451875775
ISSN:
1018-5941

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