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Foreign aid and developing countries' creditworthiness

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Author Info
Philipp Harms () (Study Center Gerzensee and University of Konstanz)
Michael Rauber () (University of Konstanz)

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Abstract

We explore whether foreign aid affects developing countries' creditworthiness, as proxied by the Institutional Investor's measure of country credit risk. Based on a simple model of international borrowing and lending, we develop the hypothesis that aid reduces the likelihood that borrowers in a given country default on their foreign debt. We then test this hypothesis, using a panel data set that covers a large number of developing countries in the 1980s and 1990s. Our empirical findings support the notion that aid improves countries' standing vis-a-vis international capital markets. However, the strength of this effect differs across types of aid and country groups.

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Publisher Info
Paper provided by Swiss National Bank, Study Center Gerzensee in its series Working Papers with number 04.05.

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Length: 38 pages
Date of creation: Jul 2004
Date of revision:
Handle: RePEc:szg:worpap:0405

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    Other versions:
    • Eaton, Jonathan & Gersovitz, Mark & Stiglitz, Joseph E., 1986. "The pure theory of country risk," European Economic Review, Elsevier, vol. 30(3), pages 481-513, June. [Downloadable!] (restricted)
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