Business Cycle Fluctuations, Large Shocks, and Development Aid: New Evidence
October 1, 2010
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Summary
We examine the cyclical properties of development aid using bilateral data for 22 donors and over 100 recipients during 1970?2005. We find that bilateral aid flows are on average procyclical with respect to business cycles in donor and recipient countries. However, they become countercyclical when recipient countries face large adverse shocks to the terms-of-trade or growth collapses-thus playing an important cushioning role. Aid outlays contract sharply during severe donor economic downturns; this effect is magnified by higher public debt levels. Additionally, bilateral aid flows are higher in the presence of IMF programs and are more countercyclical for recipient countries with stronger institutions.
Subject: Aid flows, Business cycles, Development assistance, Foreign aid, Output gap
Keywords: aid outlay, country, donor output gap, recipient country, recipient cycle, WP
Pages:
39
Volume:
2010
DOI:
Issue:
240
Series:
Working Paper No. 2010/240
Stock No:
WPIEA2010240
ISBN:
9781455209408
ISSN:
1018-5941
