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Foreign Aid and Fiscal Behavior in a Bounded Rathionality Model: Different Policy Regimes

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Author Info
Ira N. Gang () (Rutgers University)
Haider Ali Khan (GSIS, U of Denver and ADB)

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Abstract

We examine how the source of foreign aid affects the composition of the recipient government's spending. Does the source of aid -- bilateral or miltilateral -- influence ricipient policy-makers' choice between development and nondevelopment expenditure? We depart from previous literature by introducing strong asymmetries in policy-maker's preferences. With financial constraints set by foreign aid and domestic revenues, this formalization allows us to model and estimate the fiscal behavior of government policy-makers in the presense of foreign aid.

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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 199812.

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Date of creation: 10 Jun 1998
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Handle: RePEc:rut:rutres:199812

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Related research
Keywords: foreign aid; India; international assistance;

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Find related papers by JEL classification:
F35 - International Economics - - International Finance - - - Foreign Aid

References listed on IDEAS
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  1. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-41, September. [Downloadable!] (restricted)
  2. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-37, April. [Downloadable!] (restricted)
  3. Pack, Howard & Pack, Janet Rothenberg, 1990. "Is Foreign Aid Fungible? The Case of Indonesia," Economic Journal, Royal Economic Society, vol. 100(399), pages 188-94, March. [Downloadable!] (restricted)
  4. Frey, Bruno S. & Schneider, Friedrich, 1986. "Competing models of international lending activity," Journal of Development Economics, Elsevier, vol. 20(2), pages 225-245, March. [Downloadable!] (restricted)
  5. Maizels, Alfred & Nissanke, Machiko K., 1984. "Motivations for aid to developing countries," World Development, Elsevier, vol. 12(9), pages 879-900, September. [Downloadable!] (restricted)
  6. Sengupta, J K, 1970. "Optimal Stabilization Policy with a Quadratic Criterion Function," Review of Economic Studies, Blackwell Publishing, vol. 37(1), pages 127-45, January. [Downloadable!] (restricted)
  7. Heller, Peter S, 1975. "A Model of Public Fiscal Behavior in Developing Countries: Aid, Investment, and Taxation," American Economic Review, American Economic Association, vol. 65(3), pages 429-45, June. [Downloadable!] (restricted)
  8. Gang, Ira N. & Ali Khan, Haider, 1990. "Foreign aid, taxes, and public investment," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 355-369, November. [Downloadable!] (restricted)
  9. Pack, Howard & Pack, Janet Rothenberg, 1993. "Foreign Aid and the Question of Fungibility," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 258-65, May. [Downloadable!] (restricted)
  10. Binh, Tran-Nam & McGillivray, Mark, 1993. "Foreign aid, taxes and public investment A comment," Journal of Development Economics, Elsevier, vol. 41(1), pages 173-176, June. [Downloadable!] (restricted)
  11. Khan, Haider Ali & Hoshino, Eiichi, 1992. "Impact of foreign aid on the fiscal behavior of LDC governments," World Development, Elsevier, vol. 20(10), pages 1481-1488, October. [Downloadable!] (restricted)
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(explanations, 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.)

  1. Bazoumana Ouattara, 2006. "Aid, debt and fiscal policies in Senegal," Journal of International Development, John Wiley & Sons, Ltd., vol. 18(8), pages 1105-1122. [Downloadable!]
  2. Gil S. Epstein & Ira N Gang, 2006. "The Hope for Hysteresis in Foreign Aid," Departmental Working Papers 200628, Rutgers University, Department of Economics. [Downloadable!]
  3. Epstein, Gil S. & Gang, Ira N., 2008. "Good Governance and Good Aid Allocation," IZA Discussion Papers 3585, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  4. George Mavrotas & Bazoumana Ouattara, 2007. "Aid Modalities and Budgetary Response: Panel Data Evidence," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(4), pages 720-741, December. [Downloadable!] (restricted)
  5. B Ouattara, 2004. "Does Aid Promote Fiscal Indiscipline? Evidence from Dynamic Panel Model," The School of Economics Discussion Paper Series 0407, Economics, The University of Manchester. [Downloadable!]
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