Foreign Aid and Domestic Absorption

46 Pages Posted: 4 Nov 2014

See all articles by Jonathan R.W. Temple

Jonathan R.W. Temple

Centre for Economic Policy Research (CEPR)

Nicolas Van de Sijpe

University of Sheffield - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 23, 2014

Abstract

We introduce a new 'supply-push' instrument for foreign aid, to be used together with an instrumental variable estimator that filters out unobserved common factors. We use this instrument to study the effects of aid on macroeconomic ratios, and especially the ratios of consumption, investment, imports and exports to GDP. We cannot reject the hypothesis that aid is fully absorbed rather than used to build foreign reserves or exiting as capital flight, nor do we find evidence of Dutch Disease effects. Aid leads to higher consumption, while the evidence that it promotes investment is less robust.

Keywords: foreign aid, absorption, Dutch Disease

JEL Classification: F350

Suggested Citation

Temple, Jonathan R.W. and Van de Sijpe, Nicolas, Foreign Aid and Domestic Absorption (October 23, 2014). CESifo Working Paper Series No. 5029. Available at SSRN: https://ssrn.com/abstract=2518939

Jonathan R.W. Temple (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Nicolas Van de Sijpe

University of Sheffield - Department of Economics ( email )

9 Mappin Street
Sheffield, S1 4DT
UNITED KINGDOM

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