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Foreign Aid Reduces Domestic Capital Accumulation and Increases Foreign Borrowing: A Theoretical Analysis

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Author Info

  • Liutang Gong

    (Guanghua School of Management, Peking University
    Institute for Advanced Study, Wuhan University)

  • Heng-fu Zou

    (Guanghua School of Management, Peking University
    Institute for Advanced Study, Wuhan University)

Abstract

In an infinite-horizon model with endogenous time preferences, foreign aid, foreign borrowing, and domestic capital accumulation, a permanent increase in foreign aid leads to a reduction in long-run capital accumulation, a rise in domestic consumption, and an increase in foreign borrowing. Short-run analysis shows that an initial increase in foreign aid leads to a rise in investment, and a reduction in consumption and external borrowing. On the other hand, a temporal increase in foreign aid results in an increase in consumption and foreign borrowing, and a reduction in investment.

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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 1 (2000)
Issue (Month): 1 (May)
Pages: 147-163

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Handle: RePEc:cuf:journl:y:2000:v:1:i:1:p:147-163

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Keywords: Foreign aid; Foreign borrowing; Capital accumulation;

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References

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Cited by:
  1. Dai, Darong, 2011. "Stochastic Versions of Turnpike Theorems in the Sense of Uniform Topology," MPRA Paper 40216, University Library of Munich, Germany.
  2. Darong Dai, 2013. "Wealth Martingale and Neighborhood Turnpike Property In Dynamically Complete Market With Heterogeneous Investors," Economic Research Guardian, Weissberg Publishing, Weissberg Publishing, vol. 3(2), pages 86-110, December.
  3. Wenli Cheng & Dingsheng Zhang & Heng-fu Zou, 2008. "The Effects of Foreign Aid on the Creation and Distribution of Wealth," Annals of Economics and Finance, Society for AEF, Society for AEF, vol. 9(2), pages 223-237, November.
  4. Darong Dai, 2012. "Stochastic Versions of Turnpike Theorems in the Sense of Uniform Topology," Annals of Economics and Finance, Society for AEF, Society for AEF, vol. 13(2), pages 381-423, November.
  5. Mayr, Karin, 2010. "Optimal Deficit and Debt in the Presence of Foreign Aid," World Development, Elsevier, Elsevier, vol. 38(1), pages 19-27, January.
  6. Wenli Cheng & Dingsheng Zhang & Heng-Fu Zou, 2006. "THE EFFECTS OF FOREIGN AID ON THE CREATION AND DISTRIBUTION OF WEALTH Wenli Cheng, Dingsheng Zhang and Heng-Fu Zou," Development Research Unit Working Paper Series, Monash University, Department of Economics 10/06, Monash University, Department of Economics.
  7. Cui, Xiaoyong & Gong, Liutang, 2008. "Foreign aid, domestic capital accumulation, and foreign borrowing," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(3), pages 1269-1284, September.
  8. Heng-fu Zou, 2011. "Foreign Asset Accumulation and Macroeconomic Policies in a Model of Mercantilism," CEMA Working Papers, China Economics and Management Academy, Central University of Finance and Economics 432, China Economics and Management Academy, Central University of Finance and Economics.

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