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The Potential of Foreign Aid as InsuranceStephane PallageUniversity of Quebec at Montreal - Department of Economics; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE) Michel A. RobeAmerican University - Kogod School of Business Catherine BerubeOntario Ministry of Finance IMF Staff Papers, Vol. 53, No. 4, October 2006 Abstract: 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, E60 Accepted Paper SeriesDate posted: July 18, 2006Suggested CitationContact Information
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