Aid, Exports, and Growth: A Time-Series Perspective on the Dutch Disease Hypothesis

32 Pages Posted: 20 Apr 2011 Last revised: 14 Oct 2019

See all articles by Joong Shik Kang

Joong Shik Kang

International Monetary Fund (IMF)

Alessandro Prati

International Monetary Fund (IMF) - Research Department, Deceased

Alessandro Rebucci

Johns Hopkins University - Carey Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2010

Abstract

The available evidence on the effects of aid on growth is notoriously mixed. We use a novel empirical methodology, a heterogeneous panel vector-autoregression model identified through factor analysis, to study the dynamic response of exports, imports, and per capita GDP growth to a global aid shock (the common component of individual country aid-to-GDP ratios). We find that the estimated cumulative responsive of exports and per capita GDP growth to a global aid shock are strongly positively correlated, and both responses are inversely related to exchange rate overvaluation measures. We interpret this evidence as consistent with the Dutch disease hypothesis. However, we also find that, in countries with less overvalued real exchange rates, exports and per capita GDP growth respond positively to a global aid shock. This evidence suggests that preventing exchange rate overvaluations may allow aid-receiving countries to avoid the Dutch disease.

Suggested Citation

Kang, Joong Shik and Prati, Alessandro and Rebucci, Alessandro, Aid, Exports, and Growth: A Time-Series Perspective on the Dutch Disease Hypothesis (August 1, 2010). IDB Working Paper No. 29, Available at SSRN: https://ssrn.com/abstract=1815978 or http://dx.doi.org/10.2139/ssrn.1815978

Joong Shik Kang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alessandro Prati

International Monetary Fund (IMF) - Research Department, Deceased ( email )

Alessandro Rebucci (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://carey.jhu.edu/faculty-research/faculty-directory/alessandro-rebucci-phd

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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