Working Paper: CEPR ID: DP10211
Authors: Jonathan Temple; Nicolas van de Sijpe
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: absorption; Dutch disease; foreign aid
JEL Codes: F35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Foreign aid (F35) | Net imports (F29) |
| Foreign aid (F35) | Total consumption (E20) |
| Foreign aid (F35) | Household consumption (D10) |
| Foreign aid (F35) | Investment (G31) |
| Foreign aid (F35) | Exports (F10) |