Emilija Timmis, University of Nottingham

"Fiscal Effects of Aid in Ethiopia: A CVAR application"

Abstract

This paper, co-authored with another PhD student (Giulia Mascagni, University of Sussex), explores the fiscal effects of aid in Ethiopia, an understanding of which is seen as a prerequisite to analysing the broader macroeconomic effects of aid. By African standards, the data series is long, falling just short of 50 yearly observations, and includes the measure of aid actually flowing through the budget as measured by the recipient. Furthermore, we also have a qualitative dataset, collected during interviews with Ethiopian government officials (complemented by literature on fiscal history). This data provides us with an understanding of the perceptions of the role of aid and, and in particular, its effects on taxation in addition to the potential heterogeneity in fiscal responses across the different political regimes. Modelling a very simple CVAR system of government expenditure, domestic revenue, and aid, we assess whether the two exercises tell a consistent story. We find evidence that an entrenched tradition of statehood persisted across the political regimes, and the Ethiopia’s strong ownership of fiscal policies meant that aid tended to adjust to, rather than dictate, the fiscal outcomes.