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Does foreign aid play a role in the maintenance of economic growth? A non-linear analysis

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  • Harb, Nermeen
  • Hall, Stephen G.

Abstract

Should donors keep scaling up foreign aid or should they be more cautious because of the recipient country’s limited absorptive capacity? This paper investigates the non-linearity hypothesis between foreign aid and economic growth for 25 developing countries during the period from 1984 to 2008. By using state space system equations, we provide a new insight to estimating the Panel Smooth Transition Regression Model (PSTR). This method identifies the estimated coefficients at each point of time and determines endogenously an appropriate threshold level. For upper middle countries, we recognise the positive impact of aid flows on economic growth but with diminishing returns while lower middle and least developed countries support the big push concept.

Suggested Citation

  • Harb, Nermeen & Hall, Stephen G., 2019. "Does foreign aid play a role in the maintenance of economic growth? A non-linear analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 73(C), pages 192-204.
    • Handle: RePEc:eee:quaeco:v:73:y:2019:i:c:p:192-204
    DOI: 10.1016/j.qref.2018.12.002
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    3. Md Ismail Hossain & Md Istiak Hossain & Mollah Aminul Islam & Md Reza Sultanuzzaman, 2022. "Does Foreign Aid Have an Expected Role in the Economic Growth of Bangladesh? An Analysis in ARDL Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 12(6), pages 113-126, November.
    4. Tékam Oumbé, Honoré & Djeunankan, Ronald & Kos A Mougnol, Alice, 2024. "Analysing the effect of foreign aid on industrialization: Evidence from Africa," International Economics, Elsevier, vol. 178(C).
    5. Pradhan, Rudra P. & Arvin, Mak B. & Nair, Mahendhiran S. & Bennett, Sara E., 2023. "Does foreign aid affect innovation and institutional quality in middle-income countries?," Evaluation and Program Planning, Elsevier, vol. 100(C).
    6. Yao Hongxing & Olivier Joseph Abban & Alex Dankyi Boadi, 2021. "Foreign aid and economic growth: Do energy consumption, trade openness and CO2 emissions matter? A DSUR heterogeneous evidence from Africa’s trading blocs," PLOS ONE, Public Library of Science, vol. 16(6), pages 1-25, June.
    7. Muhammad Arshad & Sana Hameed Pasha & Naeem Akram & Nadia Hussain, 2023. "Estimating aggregate economic rate of return to foreign aid in Pakistan," SN Business & Economics, Springer, vol. 3(6), pages 1-19, June.
    8. Kaya, Ilker & Kaya, Ozgur, 2020. "Foreign aid, institutional quality and government fiscal behavior in emerging economies: An empirical investigation," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 59-67.
    9. Thanh Dinh Su & Canh Phuc Nguyen, 2022. "Foreign financial flows, human capital and economic growth in African developing countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 3010-3031, July.

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    More about this item

    Keywords

    Foreign aid; Economic growth; Non-linear; PSTR model;
    All these keywords.

    JEL classification:

    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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