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On the substitutability between foreign aid and international credit

  • Subhayu Bandyopadhyay
  • Sajal Lahiri
  • Javed Younas

We examine the effect of relaxing a binding borrowing constraint for a recipient country on theamount of foreign aid it receives. We do so by developing a two-country, two-period trade-theoretic model. The relaxation of the borrowing constraint reduces the flow of foreign aid, suggesting that the donor views developing nations' access to international credit markets as a substitute for foreign aid.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2012-043.

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Date of creation: 2012
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Handle: RePEc:fip:fedlwp:2012-043
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  1. Stern, Nicholas H., 1974. "Professor Bauer on development : A review article," Journal of Development Economics, Elsevier, vol. 1(3), pages 191-211, December.
  2. Swaroop, Vinaya & Jha, Shikha & Sunil Rajkumar, Andrew, 2000. "Fiscal effects of foreign aid in a federal system of governance: The case of India," Journal of Public Economics, Elsevier, vol. 77(3), pages 307-330, September.
  3. Slobodan Djajic, 2010. "Investment opportunities in the source country and temporary migration," Canadian Journal of Economics, Canadian Economics Association, vol. 43(2), pages 663-682, May.
  4. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June.
  5. Harrison, Ann E. & McMillan, Margaret S., 2003. "Does direct foreign investment affect domestic credit constraints?," Journal of International Economics, Elsevier, vol. 61(1), pages 73-100, October.
  6. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
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