Foreign Aid and the Business Cycle

Posted: 18 Jan 2002

See all articles by Michel A. Robe

Michel A. Robe

University of Illinois at Urbana-Champaign

Stephane Pallage

University of Quebec at Montreal - Department of Economics; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

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Abstract

In this paper, we document empirical regularities in the foreign aid flows to developing countries over the last three decades. In spite of a large body of literature on foreign aid and its impact on recipients, surprisingly little is known about its business cycle characteristics. We show that, for the vast majority of African recipients, aid flows are a major source of income that is highly volatile and, most importantly, overwhelmingly procyclical. For recipients outside of Africa, we find a similar - if somewhat less pronounced - pattern of aid procyclicality. In contrast, there is little evidence of aid procyclicality with the business cycle of donors. In light of the very high volatility of output in developing countries, the procyclicality of foreign aid flows from the recipients' perspective raises serious questions related to their welfare and growth.

Keywords: Foreign aid, business cycles, volatility, empirical regularities

JEL Classification: E32, F35

Suggested Citation

Robe, Michel A. and Pallage, Stephane, Foreign Aid and the Business Cycle. Available at SSRN: https://ssrn.com/abstract=295345

Michel A. Robe (Contact Author)

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Stephane Pallage

University of Quebec at Montreal - Department of Economics ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada
514-987-3000 ext. 8730 (Phone)
514-987-8494 (Fax)

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

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