Business Cycle Fluctuations, Large Macroeconomic Shocks, and Development Aid. (May 2015)

• Record Type: Journal Article
• Authors: Dabla-Norris, Era; Minoiu, Camelia; Zanna, Luis-Felipe
• Is Part Of: World development. Volume 69(2015)
• Page Start: 44
• Page End: 61
• Publication Date: 2015-05
• Subjects: foreign aid -- bilateral donors -- business cycle -- macroeconomic shocks; Economic history -- 1990- -- Periodicals; Economic assistance -- Developing countries -- Periodicals; 330.9
• DOI: 10.1016/j.worlddev.2013.12.019
• Languages: English
• ISSNs: 0305-750X

Abstract

Highlights: We analyze the cyclical properties of development aid using bilateral panel data. Aid flows are procylical relative to the donor and recipient business cycles. Aid flows become countercyclical when recipients experience large macroeconomic shocks. Aid may play an important cushioning role in developing countries. Abstract: We examine the cyclical properties of development aid using bilateral data for 22 donors and 113 recipients during 1970–2005. We find that bilateral aid flows are on average procyclical with respect to the business cycle in both donor and recipient countries. While aid outlays contract sharply during severe downturns in donor countries, they rise steeply when aid-receiving countries experience large adverse shocks. Our findings suggest that development aid may play an important cushioning role in developing countries, but only during times of severe macroeconomic stress. Our results are robust to alternate definitions of aid flows, specifications, and estimation techniques.