Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/80911
Authors: 
Lof, Matthijs
Mekasha, Tseday Jemaneh
Tarp, Finn
Year of Publication: 
2013
Series/Report no.: 
WIDER Working Paper 2013/069
Abstract: 
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.
Subjects: 
foreign aid
growth
time series
VAR models
JEL: 
F35
O11
C23
C51
ISBN: 
978-92-9230-646-5
Document Type: 
Working Paper

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