Aid and growth. New evidence using an excludable instrument

We use an excludable instrument to test the effect of foreign aid on economic growth, in a sample of 73 countries over the 1966-2009 period. We interact donors legislature fractionalization with a recipient country s probability to receive aid. The results show fractionalization to increase donors aid budgets, representing the over-time variation of our instrument, while the probability to receive aid introduces variation across recipient countries. Controlling for country- and period-specific effects that absorb the levels of the interacted variables, the interaction provides a powerful and excludable instrument. Making use of this instrument, our results show that aid increases growth.