Does foreign aid increase private investment? Evidence from panel cointegration

This paper uses panel cointegration and causality techniques to examine the long-run relationship between foreign aid and private investment. Our main result is that aid has a statistically significant negative effect on private investment. This result is robust to outliers, different measures and forms of aid, sample selection, and the sample period. In addition, we find that long-run causality runs in both directions, suggesting that an increase in aid reduces private investment and that, in turn, higher private investment leads to lower aid inflows.