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On the Potential of Foreign Aid as Insurance
Michel A. Robe American University - Kogod School of Business Stephane Pallage University of Quebec at Montreal - Department of Economics; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE) Catherine Berube Ontario Ministry of Finance November 2005 Abstract: In this paper, we quantify foreign aid's potential as an insurance mechanism against macroeconomic shocks. Within a dynamic model of aid flows between two endowment economies, we show that at least three fourths of the large welfare costs of macroeconomic fluctuations in poor countries could be alleviated by a simple reallocation of aid flows across time. In developing countries subject to persistent macroeconomic shocks, the resulting welfare improvement is of first-order magnitude.
Keywords: Macroeconomic fluctuations, Welfare, Foreign aid, Consumption smoothing JEL Classifications: F35, E32, E60 Working Paper SeriesDate posted: July 20, 2006 ; Last revised: July 20, 2006Suggested CitationContact Information
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