Date of Graduation

8-2017

Document Type

Thesis

Degree Name

Master of Arts in Economics (MA)

Degree Level

Graduate

Department

Economics

Advisor

Andrea Civelli

Committee Member

Jingping Gu

Second Committee Member

Arya Gaduh

Third Committee Member

Andrew Horowitz

Keywords

Fiscal Policy Response, Foreign Aid Effectiveness, Impulse Response Functions, Local Projections

Abstract

Does foreign foreign aid make the recipient governments spendthrift or fiscally prudent or neither? In other words, does aid resources discourage domestic revenue mobilization and stimulate government recurrent expenditure rather than funneling the resources in to long-term development projects? Empirical studies on fiscal response behavior of aid receiving governments have not offered a categorical answer yet. Results of previous studies mainly fall into the three categories - "yes", "no" and "neither". By revisiting this topic, the main contribution of current study could be the application of a newly developed time series technique - estimation of Impulse Response Functions by Local Projections - for the first time in the aid effectiveness literature. The findings presented in the form of impulse responses of fiscal policy variables to shocks to foreign aid, suggest that foreign aid depresses tax efforts, while has no significant impact on government recurrent expenditure. These results are stable to variations across the sampling composition, altering time period and data from alternate sources. Moreover, there is an indication of significant and positive association between foreign aid and public investment in the small sample of countries, however the responses do not remain significant in the larger sample with shorter time span.

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