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WP/025 How Aid Supply Responds to Economic Crises: A Panel VAR Approach

Research and Communication on Foreign Aid
The strong interdependence between the developed and developing worlds surfaced with the recent economic downturn. Due to the global character of the economy, the downturn affected not only the North but also the South. In addition, the Official Development Assistance (ODA) is subject to a pro-cyclical trend in aid which falls when donors encounter recession. We attempt to answer the question of whether and how donors adjust aid budgets in response to various macroeconomic shocks. The main objective of the study is to explore the channels as well as behavioural consequences of unexpected financial shocks on aid budget adjustments in the short run. Crises are found to affect aid budgets and their trend through two channels: directly through lower revenues and indirectly by increasing fiscal costs through exchange rates and financial volatility. In addition, this relationship between aid and the donor economy is not solely economic as the donor’s internal political orientation also plays an important role.
Publisher:
UNU-WIDER
Series:
WIDER Working Paper
Volume:
2012/25
Title:
WP/025 How Aid Supply Responds to Economic Crises: A Panel VAR Approach
Authors:
Joanna Gravier-Rymaszewska
Publication date:
February 2012
ISBN 13 Web:
978-92-9230-488-1
Copyright holder:
© UNU-WIDER
Copyright year:
2012
Keywords:
financial crisis, aid, donors, panel VAR
JEL:
C33, F35, G01, O11
Sponsor:
This working paper has been prepared within the UNU-WIDER project ‘Foreign Aid: Research and Communication (ReCom)’, directed by Tony Addison and Finn Tarp. UNU-WIDER gratefully acknowledges specific programme contributions from the governments of Denmark (Ministry of Foreign Affairs, Danida) and Sweden (Swedish International Development Cooperation Agency—Sida) for the Research and Communication (ReCom) programme. UNU-WIDER also acknowledges core financial support to UNU-WIDER’s work programme from the governments of Finland (Ministry for Foreign Affairs), the United Kingdom (Department for International Development), and the governments of Denmark and Sweden.
Format:
online