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The Impact of Unstable Aids on Consumption Volatility in Developing Countries

Discussion Papers

No.173

by KODAMA Masahiro
October 2008

ABSTRACT

In recent years, a large and expanding literature has examined the properties of developing economies with regard to the macroeconomic cycle.1 One such property that is characteristic of developing economies is large fluctuations in consumption.

Meanwhile, aid for the low income countries is extremely volatile, and under certain circumstances, the volatile aid amplifies the consumption volatility. This document examines whether it is possible that the volatile aid yields high consumption volatility in African countries that constitute the majority of the low income countries. Our numerical analysis reveals that the strongly influential aid disbursements yield a considerably large fluctuation in consumption.

Keywords: Aid, Consumption Volatility, International Macroeconomics
JEL classification: E32, E21, F35

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