Business Cycle Fluctuations, Large Shocks, and Development Aid: New Evidence

By Era Dabla-Norris, Camelia Minoiu, Luis-Felipe Zanna

October 1, 2010

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Era Dabla-Norris, Camelia Minoiu, and Luis-Felipe Zanna. Business Cycle Fluctuations, Large Shocks, and Development Aid: New Evidence, (USA: International Monetary Fund, 2010) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We examine the cyclical properties of development aid using bilateral data for 22 donors and over 100 recipients during 1970?2005. We find that bilateral aid flows are on average procyclical with respect to business cycles in donor and recipient countries. However, they become countercyclical when recipient countries face large adverse shocks to the terms-of-trade or growth collapses-thus playing an important cushioning role. Aid outlays contract sharply during severe donor economic downturns; this effect is magnified by higher public debt levels. Additionally, bilateral aid flows are higher in the presence of IMF programs and are more countercyclical for recipient countries with stronger institutions.

Subject: Aid flows, Business cycles, Development assistance, Foreign aid, Output gap

Keywords: Aid outlay, Country, Donor output gap, Recipient country, Recipient cycle, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/240
Stock No:

WPIEA2010240
ISBN:

9781455209408
ISSN:

1018-5941

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