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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

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Keywords: Aid volatility Stagnation equilibrium Poverty traps;

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References

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Citations

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Cited by:
  1. Dobronogov, Anton & Keutiben, Octave, 2014. "Containing volatility : windfall revenues for resource-rich low-income countries," Policy Research Working Paper Series 6956, The World Bank.
  2. Kathavate, Jay, 2013. "Direct & Indirect Effects of Aid Volatility on Growth: Do Stronger Institutions Play a Role?," MPRA Paper 45187, University Library of Munich, Germany.
  3. Gaoussou Diarra, 2011. "Aid unpredictability and absorptive capacity: analyzing disbursement delays in Africa," Economics Bulletin, AccessEcon, vol. 31(1), pages 1004-1017.
  4. World Bank, 2008. "Haiti : Public Expenditure Management and Financial Accountability Review," World Bank Publications, The World Bank, number 6469, February.
  5. Kodama, Masahiro, 2012. "Aid Unpredictability and Economic Growth," World Development, Elsevier, vol. 40(2), pages 266-272.
  6. Im, Fernando Gabriel & Rosenblatt, David, 2013. "Middle-income traps : a conceptual and empirical survey," Policy Research Working Paper Series 6594, The World Bank.
  7. Santanu Chatterjee & Azer Mursagulov, 2012. "Fiscal Policy and the Real Exchange Rate," IMF Working Papers 12/52, International Monetary Fund.
  8. Larru, Jose Maria, 2009. "A structural analysis of foreign aid to ten Mediterranean countries," MPRA Paper 17865, University Library of Munich, Germany.

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