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.
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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
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