The Potential of Foreign Aid as Insurance
Posted: 18 Jul 2006
Abstract
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: Suggested Citation
Pallage, Stephane and Robe, Michel A. and Berube, Catherine, The Potential of Foreign Aid as Insurance. IMF Staff Papers, Vol. 53, No. 4, October 2006, Available at SSRN: https://ssrn.com/abstract=917915
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