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Abstract
This paper investigates whether foreign aid volatility affects economic growth in countries with an effective institution. Specifically, we examine the role of institutional quality in aid volatility-growth nexus using data from 45 Sub-Saharan African countries over the period 1980–2017. We account for different aid types, namely, aid commitment and aid disbursement. Our results show that, unlike foreign aid disbursement, foreign aid commitment is growth-enhancing, but aid volatility adversely impacts on economic growth. We find that although institutional quality and its sub-dimensions enhances economic growth, it fails to curtail the adverse effect of aid volatility on economic growth. With regard to aid flows, aid benefits a country only if the donor commits to provide the aid to the recipient country. Exploiting aid flows’ policy implication, the paper further uncovers that promoting an effective institution could enhance aid effectiveness in Sub-Saharan Africa.
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