The Dynamic Implications of Foreign Aid and Its Variability
June 1, 2005
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Summary
The paper examines the effects of aid and its volatility on consumption, investment, and the structure of production in the context of an intertemporal two-sector general equilibrium model. A permanent flow of aid finances mainly consumption, a result consistent with the historical failure of aid inflows to translate into sustained growth. Shocks to aid are reflected mainly in investment fluctuations, as a result of consumption smoothing. Aid shocks result in substantial welfare losses, suggesting that aid variability should be taken into account in designing aid architecture. These results are consistent with the evidence from cross-country regressions of manufactured exports.
Subject: Consumption, Exports, Labor, Productivity, Real exchange rates
Keywords: capital stock, exchange rate, rate of return, standard deviation, WP
Pages:
41
Volume:
2005
DOI:
Issue:
119
Series:
Working Paper No. 2005/119
Stock No:
WPIEA2005119
ISBN:
9781451861389
ISSN:
1018-5941
