Aid econometrics: Lessons from a stochastic growth model |
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| Institution: | 1. University Paris-Dauphine, PSL Research University, 75016 Paris, France;2. Toulouse School of Economics, University of Toulouse Capitole, Toulouse, France;1. Montpellier Business School, Montpellier, France;2. Indian Institute of Management Bangalore, Karnataka, India;3. Indian Institute of Management Raipur, Chhattisgarh, India |
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| Abstract: | This paper evaluates the standard empirical methods employed in the study of foreign aid, when the data generating process is a calibrated stochastic growth model in which aid recipients make optimal investment and consumption decisions. When recipients receive a stochastic flow of aid and wish to smooth consumption, standard methods fail to distinguish between the response to transient and permanent aid shocks, and hence yield misleading results concerning the object of interest to policy makers: the long-run impact of aid. |
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| Keywords: | Foreign aid Stochastic growth model Convergence Local projections Consumption smoothing F35 C51 |
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