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Aid, Budgetary Policies, and the Macroeconomy: Growth, Inflation, and Welfare

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  • K C Neanidis
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    Abstract

    This paper examines the macroeconomic effects of foreign aid transfers in a small open recipient economy. The focus, however, is not on the impact of foreign aid per se but rather on aid’s influence conditional upon the different budgetary financing policies under the discretion of the recipient government. We compare the effects of an aid transfer tied to investment in a public good from a pure aid transfer, under income-tax and/or inflation-tax financing of government expenditures. The effects of each form of aid under each type of public financing are examined with respect to the economic growth rate, the rate of inflation, and the percentage change in welfare of the recipient economy. The economy is analyzed numerically and specific policy recommendations are provided for individual recipient countries.

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    File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/cgbcr/discussionpapers/dpcgbcr58.pdf
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    Bibliographic Info

    Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 58.

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    Length: 37 pages
    Date of creation: 2005
    Date of revision:
    Handle: RePEc:man:cgbcrp:58

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    Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/centre-for-growth-and-business-cycle-research/
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    1. C-J. Dalgaard & H. Hansen, 2001. "On Aid, Growth and Good Policies," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 17-41.
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    3. William Easterly & Ross Levine & David Roodman, 2004. "Aid, Policies, and Growth: Comment," American Economic Review, American Economic Association, vol. 94(3), pages 774-780, June.
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    5. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
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    7. Theodore Palivos & Chong K. Yip, 1994. "Government expenditure financing in an endogenous growth model: a comparison," Working Paper 94-1, Federal Reserve Bank of Atlanta.
    8. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages F191-F216, 06.
    9. Papanek, Gustav F, 1973. "Aid, Foreign Private Investment, Savings, and Growth in Less Developed Countries," Journal of Political Economy, University of Chicago Press, vol. 81(1), pages 120-30, Jan.-Feb..
    10. Chatterjee, Santanu & Sakoulis, Georgios & Turnovsky, Stephen J., 2003. "Unilateral capital transfers, public investment, and economic growth," European Economic Review, Elsevier, vol. 47(6), pages 1077-1103, December.
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    18. Feyzioglu, Tarhan & Swaroop, Vinaya & Zhu, Min, 1998. "A Panel Data Analysis of the Fungibility of Foreign Aid," World Bank Economic Review, World Bank Group, vol. 12(1), pages 29-58, January.
    19. Vegh, Carlos A., 1989. "The optimal inflation tax in the presence of currency substitution," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 139-146, July.
    20. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
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    22. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
    23. Santanu Chatterjee & Stephen J. Turnovsky, 2005. "Financing Public Investment through Foreign Aid: Consequences for Economic Growth and Welfare," Review of International Economics, Wiley Blackwell, vol. 13(1), pages 20-44, 02.
    24. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
    25. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
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