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Do countries with greater credit constraints receive more foreign aid?


  • Bandyopadhyay, Subhayu
  • Lahiri, Sajal
  • Younas, Javed


Donor nations may recognize that some developing nations face credit constraints in the world capital market. This knowledge may prompt donors to increase aid flows to alleviate the constraint. In such a situation, flows of foreign aid and foreign loans to developing nations may be substitutes for each other. The authors use data from 114 aid-recipient countries over the 1997-2008 period to investigate the relationship between foreign aid and foreign loans. The central finding is that this relationship is negative, lending support to the substitution hypothesis.

Suggested Citation

  • Bandyopadhyay, Subhayu & Lahiri, Sajal & Younas, Javed, 2012. "Do countries with greater credit constraints receive more foreign aid?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 481-493.
  • Handle: RePEc:fip:fedlrv:y:2012:i:november:p:481-493:n:v.94no.6

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    References listed on IDEAS

    1. Sabine Herrmann & Dubravko Mihaljek, 2010. "The determinants of cross-border bank flows to emerging markets: new empirical evidence on the spread of financial crises," BIS Working Papers 315, Bank for International Settlements.
    2. Javed Younas & Subhayu Bandyopadhyay, 2009. "Do donors care about declining trade revenue from liberalization? an analysis of bilateral aid allocation," Review, Federal Reserve Bank of St. Louis, issue May, pages 141-154.
    3. Younas, Javed, 2008. "Motivation for bilateral aid allocation: Altruism or trade benefits," European Journal of Political Economy, Elsevier, vol. 24(3), pages 661-674, September.
    4. Dudley, Leonard & Montmarquette, Claude, 1976. "A Model of the Supply of Bilateral Foreign Aid," American Economic Review, American Economic Association, vol. 66(1), pages 132-142, March.
    5. Hayakawa, Kazuhiko, 2007. "Small sample bias properties of the system GMM estimator in dynamic panel data models," Economics Letters, Elsevier, vol. 95(1), pages 32-38, April.
    6. Loayza, Norman V. & OlaberrĂ­a, Eduardo & Rigolini, Jamele & Christiaensen, Luc, 2012. "Natural Disasters and Growth: Going Beyond the Averages," World Development, Elsevier, vol. 40(7), pages 1317-1336.
    7. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
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    Cited by:

    1. Srecko Zimic & Romanos Priftis, 2017. "Sources of Borrowing and Fiscal Multipliers," 2017 Meeting Papers 294, Society for Economic Dynamics.

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    Foreign aid program; Developing countries;


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