This paper quantifies the potential of foreign aid as an insurance mechanism against macroeconomic shocks. Within a dynamic model of aid flows between two endowment economies, we show that at least three-fourths of the large welfare costs of macroeconomic fluctuations in poor countries could be alleviated by a simple reallocation of aid flows across time. In developing countries subject to persistent macroeconomic shocks, the resulting welfare improvement is of first-order magnitude.
|Original language||English (US)|
|Title of host publication||IMF Staff Papers|
|Number of pages||23|
|State||Published - Dec 2006|
|Name||IMF Staff Papers|
ASJC Scopus subject areas
- Economics and Econometrics