IDEAS home Printed from
   My bibliography  Save this paper

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.

Suggested Citation

  • Subhayu Bandyopadhyay & Sajal Lahiri & Javed Younas, 2012. "On the substitutability between foreign aid and international credit," Working Papers 2012-043, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2012-043

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. 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.
    2. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
    3. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
    4. 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.
    5. 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.
    6. Stern, Nicholas H., 1974. "Professor Bauer on development : A review article," Journal of Development Economics, Elsevier, vol. 1(3), pages 191-211, December.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Subhayu Bandyopadhyay & Sajal Lahiri & Javed Younas, 2013. "Should Easier Access to Credit Replace Foreign Aid? A Trade-theoretic Analysis," Economics Bulletin, AccessEcon, vol. 33(3), pages 2320-2327.

    More about this item


    Foreign aid program ; International finance;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:2012-043. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kathy Cosgrove). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.