Aid and income: Another time-series perspective

Arbeitspapier

In a recent article, Nowak-Lehmann, Dreher, Herzer, Klasen, and Martínez-Zarzoso (2012) (henceforth NDHKM) conclude that foreign aid has not had a significant effect on income, based on evidence from panel data potentially covering 131 countries over the period 1960-2006. The present study provides a replication of the empirical results reported by NDHKM. We uncover that NDHKM relied on a regression model that included a log transformation of variables that are not strictly positive. This led to a non-random omission of a large proportion of observations. Furthermore, we show that NDHKM's use of co-integrated regressions is not a suitable empirical strategy for estimating the causal effect of aid on income. Given the nature of the variables and the question under investigation, a Vector Autoregressive (VAR) model can arguably better address the inherent endogeneity problem in the aid-growth relationship. Evidence from a panel VAR model estimated on the dataset of NDHKM, suggests a positive and statistically significant long-run effect of aid on income.

Object Details

• ISBN: 978-92-9230-646-5
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: WIDER Working Paper ; No. 2013/069

Classification and Topics

• Classification: Wirtschaft ; Foreign Aid ; Macroeconomic Analyses of Economic Development ; Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models ; Model Construction and Estimation
• Subject: foreign aid ; growth ; time series ; VAR models

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Lof, Matthijs ; Mekasha, Tseday Jemaneh ; Tarp, Finn
• Event: Veröffentlichung
• (who): The United Nations University World Institute for Development Economics Research (UNU-WIDER)
• (where): Helsinki
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/80911
• Last update: 10.03.2025, 11:42 AM CET