SITE Working Paper Series
Aid Effectiveness: New Instrument, New Results?
() and Maria Perrotta
Abstract: Despite a voluminous literature on the topic, the question
of whether foreign aid leads to growth is still controversial. To observe
the pure effect of aid, researchers used instruments that must be exogenous
to growth and explain well aid flows. This paper argues that instruments
used in the past do not satisfy these conditions. We propose a new
instrument based on predicted aid quantity and argue that it is a
significant improvement relative to past approaches. We find a significant
and relatively big effect of aid: a one standard deviation increase in
received aid is associated with a 1.6 percentage points higher growth
Keywords: Foreign aid; growth; instrumental variables; GMM; (follow links to similar papers)
JEL-Codes: F35; O11; (follow links to similar papers)
47 pages, May 28, 2009
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