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Foreign aid is a sizable source of government financing for several developing countries and its allocation matters for the conduct of fiscal policy. This paper revisits fiscal effects of shifts in aid dependency in 59 developing countries from 1960 to 2010. It identifies structural shifts in aid dependency: upward shifts (structural increases in aid inflows) and downward shifts (structural decreases in aid inflows). These shifts are treated as shocks in aid dependency and treatment effect methods are used to assess the fiscal effects of aid. It finds that shifts in aid dependency are frequent and have significant fiscal effects. In addition to traditional evidence of tax displacement and “aid illusion,” we show that upward shifts and downward shifts in aid dependency have asymmetric effects on the fiscal accounts. Large aid inflows undermine tax capacity and public investment while large reductions in aid inflows tend to keep recipients’ tax and expenditure ratios unchanged. Moreover, the tax displacement effects tend to be temporary while the impact on expenditure items are persistent. Finally, we find that the undesirable fiscal effects of aid are more pronounced in countries with low governance scores and low absorptive capacity, as well as those with IMF-supported programs.

Economic assistance --- Fiscal policy --- Structural adjustment (Economic policy) --- Absorptive capacity --- Balance of payments --- Capacity --- Capital investments --- Capital movements --- Capital spending --- Capital --- Current spending --- Expenditure --- Expenditures, Public --- Exports and Imports --- Foreign Aid --- Foreign aid --- Intangible Capital --- International economics --- International Investment --- International relief --- Investment --- Long-term Capital Movements --- Macroeconomics: Consumption --- National Deficit Surplus --- National Government Expenditures and Related Policies: General --- National Government Expenditures and Related Policies: Infrastructures --- Other Public Investment and Capital Stock --- Public finance & taxation --- Public Finance --- Revenue administration --- Revenue --- Saving --- Taxation, Subsidies, and Revenue: General --- Wealth --- United States

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This paper shows that remittance flows significantly increase the business cycle synchronization between remittance-recipient countries and the rest of the world. Using both aggregate and bilateral remittances data in a panel data setting, the study demonstrates that this effect is robust and causal. Moreover, the econometric analysis reveals that remittance flows are more effective in channeling economic downturns than upswings from the sending countries to remittance-receiving economies. The analysis suggests that measures of openness and spillovers could be enhanced by accounting for the role of the remittances channel.

Finance --- Business & Economics --- International Finance --- Emigrant remittances. --- Foreign exchange. --- Cambistry --- Currency exchange --- Exchange, Foreign --- Foreign currency --- Foreign exchange problem --- Foreign money --- Forex --- FX (Finance) --- International exchange --- Immigrant remittances --- Remittances, Emigrant --- International finance --- Currency crises --- Foreign exchange --- Emigrant remittances --- Business cycles --- Econometric models --- E-books --- Exports and Imports --- Macroeconomics --- Business Fluctuations --- Cycles --- Economic Integration --- Remittances --- Financial Aspects of Economic Integration --- Open Economy Macroeconomics --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- International Investment --- Long-term Capital Movements --- Empirical Studies of Trade --- International economics --- Economic growth --- Foreign direct investment --- Terms of trade --- Balance of payments --- International trade --- Investments, Foreign --- Economic policy --- nternational cooperation --- United States --- Nternational cooperation