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Aid and Dutch Disease in the South Pacific

The impact of aid inflows on relative prices and output is ambiguous. Aid inflows that increase domestic expenditure are likely to cause real exchange rate appreciation, ceteris paribus. However, if this expenditure raises the capital stock in the traded goods sector, then output in this sector might not contract, at least in the steady state. Moreover, if investment in the nontraded goods sector is relatively high and/or productive, then there is not necessarily any real exchange rate appreciation in the steady state. We use time-series data to examine the impact of aid inflows on output and real exchange rates in ten South Pacific island states, and find aid inflows to produce a variety of outcomes in economies of different kinds.
Publisher:
UNU-WIDER
Series:
WIDER Research Paper
Volume:
2007/50
Title:
Aid and Dutch Disease in the South Pacific
Authors:
David Fielding
Publication date:
August 2007
ISSN Web:
1810-2611
ISBN Web:
9291909955
ISBN 13 Web:
9789291909957
Copyright holder:
© UNU-WIDER
Copyright year:
2007
Keywords:
aid, Dutch disease, South Pacific
JEL:
F41, O56
Project:
Fragility and Development
Sponsor:
UNU-WIDER gratefully acknowledges the financial contributions to the project by The Australian Agency for International Development (AusAID), the Finnish Ministry for Foreign Affairs, and the UK Department for International Development—DFID.
Format:
online
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