The real exchange rate, foreign aid and macroeconomic transmission mechanisms in Tanzania and Ghana
2013 (English)Report (Other academic)
A recent study of 36 sub-Saharan African countries found a positive impact of aid in theabsolute majority of these countries. However, for Tanzania and Ghana, two major aidrecipients, aid did not seem to have been equally beneficial. This paper singles out these twocountries for a more detailed empirical investigation. The focus is now on the effect of aidwhen allowing external and nominal factors to play a role in the macroeconomic transmissionmechanism. We conclude that aid played a significantly positive―but very different―role inthe two countries. Due in part to generous aid inflows Tanzania experienced positiveinvestment and GDP growth from the late 1960s to 2007. But, until the mid-1980s, theimpact of aid on growth was well below its potential as the large inflows of aid facilitated aserious over appreciation of the real exchange rate. In Ghana, declining aid in the 1970s wasassociated with lacking growth while the reactivation of aid flows in the 1980s supported aneconomic rebound. When monetary and external factors are properly accounted for, we findthat aid has been pivotal to growth in both real GDP and investment.
Place, publisher, year, edition, pages
Helsinki: UNU-WIDER , 2013. , 31 p.
UNU-WIDER Working Papers, ISSN 1798-7237 ; 2013/090
foreign aid, Africa, transmission channels, unit roots, Cointegrated VAR, Tanzania, Ghana
Research subject Economy, Economics
IdentifiersURN: urn:nbn:se:lnu:diva-60433ISBN: 9789292306670 (print)OAI: oai:DiVA.org:lnu-60433DiVA: diva2:1070624