The Dynamic Implications of Foreign Aid and Its Variability

By Timothy D. Lane, Leslie Lipschitz, Cristina Arellano, Ales Bulir

June 1, 2005

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Timothy D. Lane, Leslie Lipschitz, Cristina Arellano, and Ales Bulir. The Dynamic Implications of Foreign Aid and Its Variability, (USA: International Monetary Fund, 2005) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper examines the effects of aid and its volatility on consumption, investment, and the structure of production in the context of an intertemporal two-sector general equilibrium model. A permanent flow of aid finances mainly consumption, a result consistent with the historical failure of aid inflows to translate into sustained growth. Shocks to aid are reflected mainly in investment fluctuations, as a result of consumption smoothing. Aid shocks result in substantial welfare losses, suggesting that aid variability should be taken into account in designing aid architecture. These results are consistent with the evidence from cross-country regressions of manufactured exports.

Subject: Consumption, Exports, Labor, Productivity, Real exchange rates

Keywords: Capital stock, Exchange rate, Rate of return, Standard deviation, WP

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/119
Stock No:

WPIEA2005119
ISBN:

9781451861389
ISSN:

1018-5941

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