The Potential of Foreign Aid as Insurance

Posted: 18 Jul 2006

See all articles by Stephane Pallage

Stephane Pallage

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

Michel A. Robe

University of Illinois at Urbana-Champaign

Catherine Berube

Ontario Ministry of Finance

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

Suggested Citation

Pallage, Stephane and Robe, Michel A. and Berube, Catherine, The Potential of Foreign Aid as Insurance. IMF Staff Papers, Vol. 53, No. 4, October 2006, Available at SSRN: https://ssrn.com/abstract=917915

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

Michel A. Robe (Contact Author)

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Catherine Berube

Ontario Ministry of Finance ( email )

Ottawa, Ontario
Canada

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