ABSTRACT
This chapter focuses on the macroeconomic aspects of fiscal management in aid-receiving countries. It discusses the macroeconomic implications of aid, and focuses on the allocative effects and then the implications for growth. The allocative effects of aid-financed spending can be illustrated first of all in a simple two-sector general equilibrium model with tradables and nontradables. The sheer magnitude of aid in a number of countries suggests that it may have important macroeconomic effects. These can be considered at two levels: the allocative effects on the structure of production, consumption, and relative prices; and the effects on economic growth. Most empirical studies that have examined the volatility of aid have found aid to be significantly more volatile than domestic fiscal revenue. The results suggest that aid is quite volatile in relation to other sources of revenues, and this may pose challenges for short-term fiscal management.
