The Effects of Permanent and Temporary Foreign Aid on Fiscal Decisions: Evidence from Sub-Saharan Africa

Foreign aid is mostly managed by recipient governments, and their decisions on the fiscal management of aid provide insights into how it affects the macroeconomic performance. This dissertation argues that whether aid receipts are permanent or temporary is an important yet overlooked determinant of the fiscal responses to aid. I present a theoretical framework that shows that permanent and temporary aid differently affect the recipient governments' choice between taxes and debt issuance. Empirically, I focus on foreign grants received by sub-Saharan Africa over the period 1990 - 2016, and I separately identify the fiscal responses to permanent and temporary foreign grants. Results suggest that failing to distinguish between permanent and temporary grant receipts results in misleading estimates of the fiscal responses. Results provide guidelines for designing foreign aid programs.