Foreign Aid vis aa- vis Foreign Exchange Gap under the Ethiopian Economy
The study has examined the effect of of foreign aid on economic growth in Ethiopia through financing foreign exchange gap (import requirement) over the period 1974 to 2013 using multivariate cointegration analysis. The empirical result from the growth model shows that aid has a significant positive impact on growth in the long run. The aid-policy interaction term also has a significant positive effect on growth implying that the effectiveness of aid would have been higher if it was supported by a sound macroeconomic policy environment. The empirical result of import model also indicated that the positive and significant contribution of aid on import requirements in the long run. In other words the theoretical view of the gap models which is Aid can enhance growth by financing foreign exchange gap is proven in this study.
