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Aid volatility and poverty traps

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  • Agénor, Pierre-Richard
  • Aizenman, Joshua

Abstract

This paper studies the impact of aid volatility in a two-period model where production may occur with either a traditional or a modern technology. Public spending is productive and "time to build" requires expenditure in both periods for the modern technology to be used. The possibility of a poverty trap induced by high aid volatility is first examined in a benchmark case where taxation is absent. The analysis is then extended to account for self insurance (taking the form of a first-period contingency fund) financed through taxation. An increase in aid volatility is shown to raise the optimal contingency fund. But if future aid also depends on the size of the contingency fund (as a result of a moral hazard effect on donors' behavior), the optimal policy may entail no self insurance.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 91 (2010)
Issue (Month): 1 (January)
Pages: 1-7

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Handle: RePEc:eee:deveco:v:91:y:2010:i:1:p:1-7

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Web page: http://www.elsevier.com/locate/devec

Related research

Keywords: Aid volatility Stagnation equilibrium Poverty traps;

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References

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Citations

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Cited by:
  1. Santanu Chatterjee & Azer Mursagulov, 2012. "Fiscal Policy and the Real Exchange Rate," IMF Working Papers 12/52, International Monetary Fund.
  2. World Bank, 2008. "Haiti : Public Expenditure Management and Financial Accountability Review," World Bank Publications, The World Bank, number 6469.
  3. Larru, Jose Maria, 2009. "A structural analysis of foreign aid to ten Mediterranean countries," MPRA Paper 17865, University Library of Munich, Germany.
  4. Gaoussou Diarra, 2011. "Aid unpredictability and absorptive capacity: analyzing disbursement delays in Africa," Economics Bulletin, AccessEcon, vol. 31(1), pages 1004-1017.

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