On the Potential of Foreign Aid as Insurance

20 Pages Posted: 20 Jul 2006

See all articles by Michel A. Robe

Michel A. Robe

University of Richmond - E. Claiborne Robins School of Business

Stephane Pallage

University of Quebec at Montreal - Department of Economics; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Catherine Berube

Ontario Ministry of Finance

Date Written: November 2005

Abstract

In this paper, we quantify foreign aid's potential as an insurance mechanism against macroeconomic shocks. Within a dynamic model of aid flows between two endowment economies, we show that at least three fourths of the large welfare costs of macroeconomic fluctuations in poor countries could be alleviated by a simple reallocation of aid flows across time. In developing countries subject to persistent macroeconomic shocks, the resulting welfare improvement is of first-order magnitude.

Keywords: Macroeconomic fluctuations, Welfare, Foreign aid, Consumption smoothing

JEL Classification: F35, E32, E60

Suggested Citation

Robe, Michel A. and Pallage, Stephane and Berube, Catherine, On the Potential of Foreign Aid as Insurance (November 2005). Available at SSRN: https://ssrn.com/abstract=845549 or http://dx.doi.org/10.2139/ssrn.845549

Michel A. Robe (Contact Author)

University of Richmond - E. Claiborne Robins School of Business ( email )

Richmond, VA 23173
United States

Stephane Pallage

University of Quebec at Montreal - Department of Economics ( email )

P.O. Box 8888, Downtown Station
Montreal, Quebec H3C 3P8
Canada
514-987-3000 ext. 8730 (Phone)
514-987-8494 (Fax)

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Pavillon De Sève
Ste-Foy, Quebec G1K 7P4
Canada

Catherine Berube

Ontario Ministry of Finance ( email )

Ottawa, Ontario
Canada

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