Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/273893 
Year of Publication: 
2022
Series/Report no.: 
WIDER Working Paper No. 2022/107
Publisher: 
The United Nations University World Institute for Development Economics Research (UNU-WIDER), Helsinki
Abstract: 
A substantial amount of aid to developing countries is given to the government, or goes through the budget, meaning it should have an impact on government fiscal behaviour (particularly on government spending). The few existing empirical studies on the effects of aid on government spending neglect variable time-series properties, cross-country (recipient) heterogeneity, and the potential for cross-country correlation. This paper examines the impact of foreign aid and taxes on government spending for a sample of 69 developing countries over 1980-2013, taking account of dynamics characterizing fiscal data, cross-country heterogeneity, and the distorting impact of cross-section dependence. Our econometric approach addresses these problems by applying the Pesaran (2006) common correlated effects mean group estimator. We show that spending, net aid (as well as variants including grants and loans), and taxes comprise an equilibrium (cointegrated) relation. Our results provide robust evidence of a positive, long-run (as well as short-run) association between aid and spending. On average, the aid coefficients are positive but smaller than the tax coefficients, indicating that, in the long run and short run, taxes have a stronger association with expenditures than aid.
Subjects: 
aid
cross-section dependence
heterogeneity
tax revenue
JEL: 
C23
E62
F35
Persistent Identifier of the first edition: 
ISBN: 
978-92-9267-241-6
Document Type: 
Working Paper

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