Foreign Aid, Public Spending, Optimal Fiscal and Monetary Policies, and Long-Run Growth
AbstractThis paper presents a group of models showing the strikingly different implications of foreign aid to the private sector and public sector. In the first model, with decentralized decision-making and without optimal choices of fiscal policies on behalf of the government, foreign aid to the private sector has no effect on the long-run capital accumulation and it raises private consumption one to one; whereas foreign aid to the government leads to more public spending and higher private capital accumulation. In another model with optimal choices of both fiscal and monetary policies, foreign aid to the private sector gives rise to higher inflation and income taxation. Although aid to the private sector raises private money holdings and consumption, it reduces capital accumulation. However, when foreign aid is provided to the public sector, the government cuts both the inflation rate and the income tax rate, raises public spending, and provides more incentives for private capital accumulation and money holdings. In the long run, aid to the public sector leads to more private capital accumulation, consumption, money holdings, and welfare.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 309.
Length: 28 pages
Date of creation: Mar 2008
Date of revision:
Foreign aid; Capital accumulation; Income taxation; Inflation; Growth;
Find related papers by JEL classification:
- E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- F35 - International Economics - - International Finance - - - Foreign Aid
- O1 - Economic Development, Technological Change, and Growth - - Economic Development
- O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alberto Alesina & Beatrice Weder, 1999.
"Do Corrupt Governments Receive Less Foreign Aid?,"
NBER Working Papers
7108, National Bureau of Economic Research, Inc.
- White, Howard & Luttik, Joke & DEC, 1994. "The countrywide effects of aid," Policy Research Working Paper Series 1337, The World Bank.
- Azam, Jean-Paul & Laffont, Jean-Jacques, 2003. "Contracting for aid," Journal of Development Economics, Elsevier, vol. 70(1), pages 25-58, February.
- Giovannini, Alberto, 1985. "Saving and the real interest rate in LDCs," Journal of Development Economics, Elsevier, vol. 18(2-3), pages 197-217, August.
- Wane, Waly, 2004. "The quality of foreign aid : country selectivity or donors incentives?," Policy Research Working Paper Series 3325, The World Bank.
- Dollar, David & Alesina, Alberto, 2000.
"Who Gives Foreign Aid to Whom and Why?,"
4553020, Harvard University Department of Economics.
- Svensson, Jakob, 2003. "Why conditional aid does not work and what can be done about it?," Journal of Development Economics, Elsevier, vol. 70(2), pages 381-402, April.
- Levy, Victor, 1987. "Does Concessionary Aid Lead to Higher Investment Rates in Low-Income Countries?," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 152-56, February.
- van de Walle, Dominique & Cratty, Dorothyjean, 2005. "Do donors get what they paid for? micro evidence on the fungibility of development project aid," Policy Research Working Paper Series 3542, The World Bank.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Qiang Gao).
If references are entirely missing, you can add them using this form.