Financial Dollarization and European Union Membership

We analyze the effect of European Union (EU) membership on financial dollarization for the Central and Eastern European countries. Using a unique monthly dataset that spans about two decades, we find that both the accession process toward EU membership and EU entry have a direct impact on deposit and loan dollarization. EU membership reduces deposit dollarization while it increases loan dollarization. The negative effect on deposit dollarization captures the increased confidence of the private sector in the domestic currency as they consider the EU admission process to reflect their government’s commitment in promoting policies of long-run currency stability. The positive impact on credit dollarization is the outcome of a greater convergence of exchange rates to the euro and the subsequent anticipation for a lower currency risk, which diminishes the cost of foreign currency borrowing.financial dollarization, European Union membership, accession process

The Allocation of volatile aid and economic growth: Evidence and a suggestive theory

We present evidence on the effects of aid transfers and their degree of volatility on economic growth and show that these effects can be categorised in relation to the allocation of foreign aid between productive and non-productive purposes. Using a stochastic endogenous growth model, we provide a theoretical rationalisation for our empirical evidence. Both the empirical and the theoretical analyses generate a pertinent conclusion: situations in which aid actually inhibits the recipient’s growth rate may appear if and only if aid is volatile. As a result, we conclude that it is only in conjunction with the presence of aid variability that aid allocation decisions determine whether aid hurts or promotes trend growth.Foreign aid; Growth

Aid Effectiveness: The Role of the Local Elite

We study the importance of the local elite as a determinant of the effectiveness of foreign aid in developing countries. An "extractive" elite will misuse aid flows, an issue that is probably as old as foreign aid itself. We proxy for the existence of an "extractive" elite by using an historically determined variable: the percentage of European settlers in colonial times. Our econometric results clearly show the importance of this factor and its robustness to a wide set of alternative aid-growth relationships advanced in the literature.Foreign aid; Elite; Economic growth

Colonialism, elite Formation and corruption

This paper argues that corruption in developing countries has deep historical roots; going all the way back to the characteristics of their colonial experience. The degree of European settlement during colonial times is used to differentiate between types of colonial experience, and is found to be a powerful explanatory factor of present-day corruption levels. The relationship is non-linear, as higher levels of European set- tlement resulted in more powerful elites (and more corruption) only as long as Europeans remained a minority group in the total population.

Corruption, Seigniorage and Growth: Theory and Evidence

This paper presents an analysis of the effect of bureaucratic corruption on economic growth through a public finance transmission channel. At the theoretical level, we develop a simple dynamic general equilibrium model in which financial intermediaries make portfolio decisions on behalf of agents, and bureaucrats collect tax revenues on behalf of the government. Corruption takes the form of the embezzlement of public funds, the effect of which is to increase the government’s reliance on seigniorage finance. This leads to an increase in inflation which, in turn, reduces capital accumulation and growth. At the empirical level, we use data on 82 countries over a 20-year period to test the predictions of our model. Taking proper account of the government’s budget constraint, we find strong evidence to support these predictions under different estimation strategies. Our results are robust to a wide range of sensitivity tests.corruption, seigniorage, inflation, growth

The allocation of volatile aid and economic growth: evidence and a suggestive theory

We present evidence on the effects of aid transfers and their degree of volatility on economic growth and show that these effects can be categorised in relation to the allocation of foreign aid between productive and non-productive purposes. Using a stochastic endogenous growth model, we provide a theoretical rationalisation for our empirical evidence. Both the empirical and the theoretical analyses generate a pertinent conclusion: situations in which aid actually inhibits the recipient’s growth rate may appear if and only if aid is volatile. As a result, we conclude that it is only in conjunction with the presence of aid variability that aid allocation decisions determine whether aid hurts or promotes trend growth