01909cas a2200241 a 4500 AALejournalIMF005038 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451869620 1018-5941 BD-DhAAL BD-DhAAL Dhasmana, Anubha. Welfare Gains of Aid Indexation in Small Open Economies / Anubha Dhasmana. Washington, D.C. : International Monetary Fund, 2008. 1 online resource (38 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students Foreign aid flows to poor, aid-dependent economies are highly volatile and pro-cyclical. Shortfalls in aid coincide with shortfalls in GDP and government revenues. This increases the consumption volatility in aid dependent countries, thereby causing substantial welfare losses. This paper finds that indexing aid flows to exogenous shocks like a change in the terms of trade can significantly improve the welfare of aid-dependent country by lowering its output and consumption volatility. Compared to the benchmark specification with stochastic aid flows, indexation of aid flows to terms of trade shocks can reduce the cost of business cycle fluctuations in the recipient country by four percent of permanent consumption. Moreover, use of indexed aid can allow donors to reduce the aid flows by three percent without lowering the level of welfare in the recipient country. Mode of access: Internet IMF Working Papers; Working Paper ; No. 2008/101 Full text available on IMF http://elibrary.imf.org/view/journals/001/2008/101/001.2008.issue-101-en.xml IMF e-Library