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AcknowledgementsThis is a substantially revised version of a paper prepared for a workshop session in the 'Public Choice and Development' series at HWWA, Hamburg 14 November 2001. We are grateful to Henrik Hansen, Finn Tarp and workshop participants for useful comments on the earlier draft.
____________________________________________________________ July 2003Modelling the Fiscal Effects of Aid: An Impulse Response Analysis for Ghana by Robert Osei, Oliver Morrissey and Tim Lloyd
AbstractAn important feature of aid to developing countries is that it is given to the government. As a result, aid should be expected to affect fiscal behaviour. Traditional approaches to modelling fiscal effects are beset by theoretical and empirical problems. This paper applies techniques developed in the 'macroeconometrics' literature to estimate the dynamic linkages between aid and fiscal aggregates. Vector autoregressive methods are applied to 34 years of annual data in Ghana to model the effect of aid on fiscal behaviour. Results suggest that aid to Ghana has been associated with reduced domestic borrowing and increased tax effort, combining to increase public spending. The paper provides evidence that aid has been associated with improved fiscal performance in Ghana, implying that the aid has been used sensibly (at least in fiscal terms).