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Abstract
The long-run economic benefits of foreign aid in a recipient country depend on the absorptive capacity of the nation in terms of institutions, macroeconomic stability, and financial development. While the role of institutional quality on the aid-growth nexus has already been empirically determined, the moderating roles of inflation and financial development have not been investigated. Therefore, our study addresses these research gaps by examining the moderating roles of inflation and financial development on the impact of aid on economic growth in Bangladesh during 1980–2020 period. It utilizes the Autoregressive Distributed Lag (ARDL) bounds testing technique. This study reveals that the impact of aid on growth depends on the levels of inflation and financial development. If inflation rises above 9.85% threshold level, the marginal effect of aid on growth turns negative. In contrast, the marginal effect of aid on growth is positive even at the maximum level of financial development. The outcomes are robust to alternative proxies and structural breaks. The implication is that an increase in aid and financial development boosts economic growth, but high inflation limits the efficacy of aid. Therefore, to reap the long-term economic benefits of aid, countries should embrace the requisite macroeconomic stability and financial development.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 A conditional hypothesis represents a situation in which the impact of an independent variable (e.g. aid) on a dependent variable (e.g. economic growth) is influenced by another variable (e.g. inflation).
2 The results can be supplied on request, but not shown due to space constraint.