How is foreign aid spent? Evidence from a natural experiment

Eric Werker, Faisal Z. Ahmed, Charles Cohen

Research output: Contribution to journalArticlepeer-review

95 Scopus citations


We use oil price fluctuations to test the impact of transfers from wealthy OPEC nations to their poorer Muslim allies. The instrument identifies plausibly exogenous variation in foreign aid. We investigate how aid is spent by tracking its short-run effect on aggregate demand, national accounts, and balance of payments. Aid affects most components of GDP though it has no statistically identifiable impact on prices or economic growth. Much aid is consumed, primarily in the form of imported noncapital goods. Aid substitutes for domestic savings, has no effect on the financial account, and leads to unaccounted capital flight.

Original languageEnglish (US)
Pages (from-to)225-244
Number of pages20
JournalAmerican Economic Journal: Macroeconomics
Issue number2
StatePublished - Aug 1 2009

All Science Journal Classification (ASJC) codes

  • General Economics, Econometrics and Finance


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