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Effects of development aid (grants and loans) on the economic dynamics of the recipient country

Author

Listed:
  • Cuong Le-Van

  • Ngoc Sang Pham

  • Thi Kim Cuong Pham

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper investigates the nexus between foreign aid (in both forms: grant and loan), poverty trap, and economic development in a recipient country by using a Solow model with two new ingredients: a development loan and a fixed cost in the production process. The presence of this fixed cost generates a poverty trap. We show that foreign aid may help the country to escape from the poverty trap and converge to a stable steady-state in the long run, but only if (i) the country's characteristics, such as saving rate, initial capital, governance quality, and productivity are good enough, (ii) the fixed cost is relatively low, and (iii) loan rule is generous enough. We also show that our model with foreign aid has room for endogenous cycles, unlike the standard Solow model.

Suggested Citation

  • Cuong Le-Van & Ngoc Sang Pham & Thi Kim Cuong Pham, 2023. "Effects of development aid (grants and loans) on the economic dynamics of the recipient country," Working Papers hal-04159845, HAL.
    • Handle: RePEc:hal:wpaper:hal-04159845
    Note: View the original document on HAL open archive server: https://hal.science/hal-04159845v1
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    Cited by:

    1. is not listed on IDEAS
    2. Ngoc-Sang Pham, 2023. "Some Lectures on Macroeconomics," Working Papers hal-04366349, HAL.

    More about this item

    Keywords

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    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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