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Does Aid Mitigate External Shocks?
Author(s) -
Collier Paul,
Goderis Benedikt
Publication year - 2009
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/j.1467-9361.2009.00500.x
Subject(s) - economics , exchange rate flexibility , commodity , shock (circulatory) , flexibility (engineering) , monetary economics , exchange rate , aid effectiveness , price shock , developing country , international economics , exchange rate regime , finance , economic growth , medicine , management
The authors investigate the role of aid in mitigating the adverse effects of commodity export price shocks on growth in commodity‐dependent countries. Using a large cross‐country dataset, they find that negative shocks matter for short‐term growth, while the ex ante risk of shocks does not seem to matter. They also find that both the level of aid and the flexibility of the exchange rate substantially lower the adverse growth effect of shocks. While the mitigating effect of aid is significant in both countries with pegs and countries with floats, the effect seems to be smaller for the latter, suggesting that aid and exchange rate flexibility are partly substitutes. They investigate whether aid has historically been targeted at shock‐prone countries, but find no evidence that this is the case. This suggests that donors could increase aid effectiveness by redirecting aid toward countries with a high incidence of commodity export price shocks.