Macroeconomic Effect of Foreign Aid

Abstract

The study examines the linear and non-linear macroeconomic effect of foreign aid in Nigeria between 1970 and 2017. The macroeconomic variables considered include real GDP per capital growth, investment, real interest rate and consumer price index. It adopts the Linear and Non-Linear ARDL estimation techniques. The linear regression results show foreign aid to have no significant effect on welfare, measured by RGDPPC in the short-run and long-run. On investment however, foreign aid exerts significant positive influence both in the short-run and long-run and the impact of foreign aid on real interest rate and consumer price index is felt more in the longrun, than in the short-run. Looking into the asymmetry relationship, it was found that increase in aid significantly reduces welfare in Nigeria and decrease in aid significantly increases welfare and both positive and negative changes in aid have no significant effect on investment. Real interest rate is unaffected by increase in aid, but significantly affected by decrease in aid. Consumer price index is significantly affected by both positive and negative change in aid in short run and long run.