Like other developing countries, Pakistan also suffers from low saving base. Historically, foreign aid has played a crucial role in filling the gap between saving and investment in case of Pakistan, albeit with considerable volatility. We analyze the impact of foreign aid and its volatility in on economic growth in Pakistan over the period of 1974-2015; foreign aid effectiveness has been evaluated in the presence of sound macroeconomic policies by constructing an index of macroeconomic policy using principal component method. The study concluded that foreign aid and its volatility has negative impact on economic growth in Pakistan under currently prevailing macroeconomic policies. This study departs from existing studies in two ways. First, Generalized Method of Moments (GMM) approach has been used in this study to control for potential endogenity related to aid inflow. Secondly, aid volatility, measured through Hodrick–Prescott (HP) filter, has been incorporated in aid-growth nexus to gauge its impact of growth performance of the country


Foreign aid, economic growth, macroeconomic policy, generalized method of moments, endogenity, volatility, principal component method.

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