Foreign aid and domestic savings in less developed countries: Some tests for causality

Abstract

The negative correlation between foreign aid and domestic savings rates in less developed countries is an accepted fact in the existing literature. The direction of causality, however, remains a subject of dispute. In this paper we use time-series data to investigate causal relationships. We conclude that causal relationships are not universal and it is suggested that, in those countries where they do hold, the direction of causality may depend upon the proportions of aid from bilateral and multilateral sources.