Author Abstract
We use yearly variations in the price of oil to construct a powerful new instrument to test the impact of an important but often-overlooked foreign aid channel: money given by wealthy OPEC nations to their poorer Muslim allies. The instrument identifies plausibly exogenous variation in foreign aid. We investigate how aid is spent by tracking its short-run effect on aggregate demand, prices, the national accounts, savings, and the balance of payments. We find that aid is mostly consumed, primarily in the form of higher imports of non-capital goods. Some aid is invested and aid has a small but insignificant effect on growth. Aid has no effect on the financial account, but does raise holdings of foreign reserves.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: April 2007
- HBS Working Paper Number: 07-074
- Faculty Unit(s): Business, Government and International Economy