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Aid, Policies and Growth: A Non-Canonical Alternative for solving This Puzzle

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  • Fuentes, Raúl
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    Abstract

    This paper presents a two-sector small semi-open economy Ramsey growth model involving foreign aid as an input in the production function. An activist government allocates this input endogenously across sectors and optimizes policies in a non-standard way. Once calibrated, mainly on countries exhibiting medium relative prices values, the model reproduces the main stylized facts outlined in the literature and suggests a strategy that could make aid work. --

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    Bibliographic Info

    Paper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Kiel 2005 with number 14.

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    Date of creation: 2005
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    Handle: RePEc:zbw:gdec05:3487

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    Keywords: Foreign aid; Economic development; Economic growth; Quantitative approach;

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    1. Alesina, Alberto & Rodrik, Dani, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 465-90, May.
    2. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
    3. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
    4. Weder, Mark, 2001. "Indeterminacy in a Small Open Economy Ramsey Growth Model," Journal of Economic Theory, Elsevier, vol. 98(2), pages 339-356, June.
    5. Benassy, Jean-Pascal, 2001. "On the optimality of activist policies with a less informed government," Journal of Monetary Economics, Elsevier, vol. 47(1), pages 45-59, February.
    6. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
    7. Przeworski, Adam & Vreeland, James Raymond, 2000. "The effect of IMF programs on economic growth," Journal of Development Economics, Elsevier, vol. 62(2), pages 385-421, August.
    8. McGillivray, Mark, 2000. "Aid and Public Sector Behavior in Developing Countries," Review of Development Economics, Wiley Blackwell, vol. 4(2), pages 156-63, June.
    9. Benhabib, Jess & Farmer, Roger E. A., 1996. "Indeterminacy and sector-specific externalities," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 421-443, June.
    10. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
    11. Rui Castro, 2005. "Economic Development and Growth in the World Economy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 195-230, January.
    12. Easterly, William, 1999. "The ghost of financing gap: testing the growth model used in the international financial institutions," Journal of Development Economics, Elsevier, vol. 60(2), pages 423-438, December.
    13. J. Svensson, 1999. "Aid, Growth and Democracy," Economics and Politics, Wiley Blackwell, vol. 11(3), pages 275-297, November.
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