VOLATILITY AND BUSINESS CYCLE PROPERTIES OF FOREIGN FINANCIAL AID INTO DEVELOPING COUNTRIES

Year 2016, Volume: 5 Issue: 1, 1 - 16, 30.03.2016

Elif Akben Selcuk , Duygu Undeger Soguktas

https://doi.org/10.17261/Pressacademia.2016116549

Abstract

The objective of this study is to investigate the
volatilities and business cycle characteristics of three components of foreign
financial aid into developing countries, namely emergency, program and project
aid from the viewpoint of both recipients and donors. Results show that
emergency aid inflows are more volatile than both program and project aid in
both African and non-African countries and program aid is found to be more
volatile than project aid in both subsamples. Although the volatility of total
aid inflows is lower than component-wise volatilities, it is still higher than
the volatility of GDP for recipient countries. The volatility of donors’ total
aid outflows is also found to be greater than the volatility of their GDP.
Results further showed that total aid is acyclical for the African countries in
the sample. The same finding applies to emergency aid, project aid, and program
aid. For the non-African countries, project aid inflows were found to be
procyclical. Emergency aid and program aid were acyclical while total aid
inflows to the countries outside Africa were found to be procyclical/acyclical.
The final result that emerged from the analysis is that donors give foreign aid
in an acyclical fashion to the recipients in the sample.  

Keywords

Foreign financial aid, developing countries, business cycle, volatility

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