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Publication - Professor Jon Temple

    Foreign aid and domestic absorption


    Temple, J & Sijpe, NVd, 2017, ‘Foreign aid and domestic absorption’. Journal of International Economics, vol 108., pp. 431-443


    This paper introduces 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.

    Full details in the University publications repository