The Dynamic Implications of Foreign Aid and its Variability

By C. Arellano, Aleš Bulíř, Timothy D. Lane, L. Lipschitz. Social Science Research Network, 2005

265 citations recorded by the source corpus.

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.

Subfields: Development, Economics and Econometrics, Information Systems

View Paper: https://www.semanticscholar.org/paper/b5b3d8b84e9327d9486c0a410a700d4d5ddddb39

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Citations in the corpus

Is Foreign Aid a Vanguard of Foreign Direct Investment? A Gravity-Equation Approach (2010, background): “Also, Arellano et al. (2009) point to a “Dutch disease” effect of aid. Aid is likely to increase the supply of tradables and hence to lower their price relative to nontradables. Since FDI in LDCs is mostly invested in tradable sectors, aid may discourage FDI through this channel that distorts the al”
Why Does Foreign Direct Investment Go Where It Goes?: New Evidence From African Countries (2012, background): “Indeed, given that FDI in developing countries is mostly invested in tradable sectors, foreign aid may discourage FDI through this channel that distorts the allocation of domestic resources (Arellano et al, 2009).”
Remittances and the Dutch disease (2009, unknown): “We abstract from the derivation of the entire solution of the household’s behavior with these preferences here, and highlight the key implication: that the interjection of this preference specification results in a modification of the equation describing the marginal rate of substitution between con”
When and Why Worry About Real Exchange Rate Appreciation? The Missing Link Between Dutch Disease and Growth (2013, background): “Some papers emphasize intertemporal differences of DD, like Bruno and Sachs (1982), Chaterji and Price (1988), Arellano et al. (2005), and Prati and Tressel (2005)—the later two focusing on the DD-effects of foreign aid.”
Donors and domestic politics: Political influences on foreign aid effort (2010, unknown): “But volatility in aid is an increasingly cited cause of id ineffectiveness (Arellano et al., 2009; Bulir & Hamann, 2003; ulir & Lane, 2002; Eifert & Gelb, 2005; Lensink & Morrissey, 2000). owever, this literature generally has been silent on the causes of olatility.”
Does foreign aid harm political institutions (2015, methodology): “that aid volatility is high and is likely to undermine its effectiveness (Bulíř and Hamann, 2008; Arellano et al., 2009).”
On the simultaneity problem in the aid and growth debate (2013, background): “24 Arellano et al. (2008) show in a DSGE model, where consumers are modeled to perfectly smooth consumption over time, that whether an aid inow increases investment depends on the persistence of the aid shock.”