Discussion Paper Details

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Title: Foreign Aid and Domestic Absorption

Author(s): Jonathan Temple and Nicolas van de Sijpe

Publication Date: October 2014

Keyword(s): absorption, Dutch Disease and foreign aid

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Temple, J and van de Sijpe, N. 2014. 'Foreign Aid and Domestic Absorption'. London, Centre for Economic Policy Research.