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Foreign Aid and Domestic Absorption

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  • 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.

Suggested Citation

  • Jonathan Temple & Nicolas Van de Sijpe, 2014. "Foreign Aid and Domestic Absorption," CESifo Working Paper Series 5029, CESifo.
    • Handle: RePEc:ces:ceswps:_5029
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    More about this item

    Keywords

    foreign aid; absorption; Dutch Disease;
    All these keywords.

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid

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