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Where Has All the Money Gone? Foreign Aid and the Composition of Government Spending
-
Santanu Chatterjee
,
Paola Giuliano
Published/Copyright:
August 20, 2012
Abstract
This paper examines the link between foreign aid and the composition of government spending in aid-recipient countries. Two questions are addressed: (i) does foreign aid crowd out government spending in aid-recipient countries, and (ii) does the degree of fungibility vary across different categories of aid? Using a panel dataset of 67 countries for 1972-2000 we find that at the aggregate level about 70 percent of total aid is fungible. We also find that aid targeted for public investment crowds out about 80-90 percent of domestic government spending on public investment. Aid does not affect private investment, but has a strong positive impact on household consumption. The results are also robust to checks for causality. These findings are significant, since more than two-thirds of all aid flows to developing countries are tied to public investment projects.
Published Online: 2012-8-20
©2012 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Keywords for this article
foreign aid;
aid effectiveness;
fungibility;
government spending;
fiscal policy
Articles in the same Issue
- Advances Article
- Life Cycle Dynamics of Income Uncertainty and Consumption
- Immigration, Fiscal Policy, and Welfare in an Aging Population
- Contributions Article
- Who Gets the Credit? And Does It Matter? Household vs. Firm Lending Across Countries
- How Much Did the 2009 Australian Fiscal Stimulus Boost Demand? Evidence from Household-Reported Spending Effects
- Economic Growth and Political Survival
- Exchange Rate Uncertainty and Trade
- Monetary and Macroprudential Policy Rules in a Model with House Price Booms
- A Unified Framework for Using Micro-Data to Compare Dynamic Time-Dependent Price-Setting Models
- Government Policy Response to War-Expenditure Shocks
- Poverty Traps and Growth in a Model of Endogenous Time Preference
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- Great Spending Crashes
- Capital Utilization and the Amplification Mechanism
- Topics Article
- Unemployment Expectations and the Business Cycle
- Sector-Specific Capital, Labor Market Distortions and Cross-Country Income Differences: A Two-Sector General Equilibrium Approach
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- News Shocks, Productivity and the U.S. Investment Boom-Bust Cycle
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- Misallocation and Manufacturing TFP in Bolivia during the Market Liberalization Period
- Government Debt Dynamics Under Discretion
- The Global Transmission of Government Debt
- Is Discretionary Fiscal Policy in Japan Effective?
- The Laffer Curve in a Frictional Labor Market
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