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The Fiscal Effects of Aid in Ghana

An important feature of aid to developing countries is that it is given to the government. As a result, aid should be expected to affect fiscal behaviour, although theory and existing evidence is ambiguous regarding the nature of these effects. This paper applies techniques developed in the ‘macroeconometrics’ literature to estimate the dynamic linkages between aid and fiscal aggregates. Vector autoregressive methods are applied to 34 years of annual data in Ghana to model the effect of aid on fiscal behaviour. Results suggest that aid to Ghana has been associated with reduced domestic borrowing and increased tax effort, combining to increase public spending. This constructive use of aid to maintain fiscal balance is evident since the mid-1980s, following Ghana’s structural adjustment programme. The paper provides evidence that aid has been associated with improved fiscal performance in Ghana, implying that the aid has been used sensibly (at least in fiscal terms).
Publisher:
UNU-WIDER
Series:
WIDER Research Paper
Volume:
2005/61
Title:
The Fiscal Effects of Aid in Ghana
Authors:
Robert Osei, Oliver Morrissey, and Tim Lloyd
Publication date:
September 2005
ISSN Web:
1810-2611
ISBN Web:
9291907448
ISBN 13 Web:
9789291907441
Copyright holder:
© UNU-WIDER
Copyright year:
2005
Keywords:
aid, fungibility, fiscal response, impulse response
JEL:
F35, O23, O55, H60
Project:
Sharing Global Prosperity Conference
Sponsor:
The governments of Denmark (Royal Ministry of Foreign Affairs), Finland (Ministry for Foreign Affairs), Norway (Royal Ministry of Foreign Affairs), Sweden (Swedish International Development Cooperation Agency-Sida) and the United Kingdom (Department for International Development)
Format:
online
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