The Potential of Foreign Aid as Insurance
University of Quebec at Montreal - Department of Economics; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)
Michel A. Robe
American University - Kogod School of Business
Ontario Ministry of Finance
IMF Staff Papers, Vol. 53, No. 4, October 2006
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 Classification: F35, E32, E60Accepted Paper Series
Date posted: July 18, 2006
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