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Should Easier Access to International Credit Replace Foreign Aid?

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Listed author(s):
  • Bandyopadhyay, Subhayu

    ()

    (Federal Reserve Bank of St. Louis)

  • Lahiri, Sajal

    ()

    (Southern Illinois University Carbondale)

  • Younas, Javed

    ()

    (American University of Sharjah)

Abstract

We examine the interaction between foreign aid and binding borrowing constraint for a recipient country. We also analyze how these two instruments affect economic growth via non-linear relationships. First of all, we develop a two-country, two-period trade-theoretic model to develop testable hypotheses and then we use dynamic panel analysis to test those hypotheses empirically. Our main findings are that: (i) better access to international credit for a recipient country reduces the amount of foreign aid it receives, and (ii) there is a critical level of international financial transfer, and the marginal effect of foreign aid is larger than that of loans if and only if the transfer (loans or foreign aid) is below this critical level.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6024.

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Length: 44 pages
Date of creation: Oct 2011
Handle: RePEc:iza:izadps:dp6024
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Keywords: foreign aid; foreign loans; borrowing constraint; economic growth; fungibility; public input;

Other versions of this item:

Find related papers by JEL classification:
  • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
  • F35 - International Economics - - International Finance - - - Foreign Aid
  • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
  • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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