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Aid, Budgetary Policies, and the Macroeconomy: Growth, Inflation, and Welfare

  • K C Neanidis
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    This paper examines the macroeconomic effects of foreign aid transfers in a small open recipient economy. The focus, however, is not on the impact of foreign aid per se but rather on aid’s influence conditional upon the different budgetary financing policies under the discretion of the recipient government. We compare the effects of an aid transfer tied to investment in a public good from a pure aid transfer, under income-tax and/or inflation-tax financing of government expenditures. The effects of each form of aid under each type of public financing are examined with respect to the economic growth rate, the rate of inflation, and the percentage change in welfare of the recipient economy. The economy is analyzed numerically and specific policy recommendations are provided for individual recipient countries.

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    File URL: http://hummedia.manchester.ac.uk/schools/soss/cgbcr/discussionpapers/dpcgbcr58.pdf
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    Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 58.

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    Length: 37 pages
    Date of creation: 2005
    Date of revision:
    Handle: RePEc:man:cgbcrp:58
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    Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/centre-for-growth-and-business-cycle-research/

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    1. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
    2. Vegh, Carlos A., 1989. "The optimal inflation tax in the presence of currency substitution," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 139-146, July.
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    4. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2001. "On the Empirics of Foreign Aid and Growth," EPRU Working Paper Series 03-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Sep 2003.
    5. J. Svensson, 1999. "Aid, Growth and Democracy," Economics and Politics, Wiley Blackwell, vol. 11(3), pages 275-297, November.
    6. Theodore Palivos & Chong K. Yip, 1995. "Government Expenditure Financing in an Endogenous Growth Model: A Comparison," Departmental Working Papers _057, Chinese University of Hong Kong, Department of Economics.
    7. Hatzipanayotou, Panos & Michael, Michael S, 2000. "The Financing of Foreign Aid and Welfare: Income versus Consumption Tax," Review of Development Economics, Wiley Blackwell, vol. 4(1), pages 21-38, February.
    8. Feyzioglu, Tarhan & Swaroop, Vinaya & Zhu, Min, 1998. "A Panel Data Analysis of the Fungibility of Foreign Aid," World Bank Economic Review, World Bank Group, vol. 12(1), pages 29-58, January.
    9. Robert J. Barro & Xavier Sala-i-Martin, 1990. "Public Finance in Models of Economic Growth," NBER Working Papers 3362, National Bureau of Economic Research, Inc.
    10. Robert Lensink & Howard White, 2000. "Assessing Aid: A Manifesto for Aid in the 21st Century?," Oxford Development Studies, Taylor & Francis Journals, vol. 28(1), pages 5-18.
    11. Hansen, Henrik & Tarp, Finn, 1999. "Aid Effectiveness Disputed," MPRA Paper 62290, University Library of Munich, Germany.
    12. Hansen, Henrik & Tarp, Finn, 2000. "Aid and Growth Regressions," MPRA Paper 62288, University Library of Munich, Germany.
    13. Santanu Chatterjee & Georgios Sakoulis & Stephen Turnovsky, 2000. "Unilateral Capital Transfers, Public Investment, and Economic Growth," Discussion Papers in Economics at the University of Washington 0008, Department of Economics at the University of Washington.
    14. Santanu Chatterjee & Stephen J. Turnovsky, 2005. "Financing Public Investment through Foreign Aid: Consequences for Economic Growth and Welfare," Review of International Economics, Wiley Blackwell, vol. 13(1), pages 20-44, 02.
    15. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
    16. William Easterly & Ross Levine & David Roodman, 2004. "Aid, Policies, and Growth: Comment," American Economic Review, American Economic Association, vol. 94(3), pages 774-780, June.
    17. Sturzenegger, Federico, 1997. "Understanding the welfare implications of currency substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 391-416.
    18. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
    19. Santanu Chatterjee & Stephen Turnovsky, 2002. "Substitutability of Capital, Investment Costs, and Foreign Aid," Working Papers UWEC-2002-08-P, University of Washington, Department of Economics, revised Nov 2002.
    20. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
    21. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
    22. Tandon, Ajay & Wang, Yong, 1999. "Inflationary Finance, Capital Controls, and Currency Substitution," Review of International Economics, Wiley Blackwell, vol. 7(4), pages 597-612, November.
    23. Papanek, Gustav F, 1973. "Aid, Foreign Private Investment, Savings, and Growth in Less Developed Countries," Journal of Political Economy, University of Chicago Press, vol. 81(1), pages 120-30, Jan.-Feb..
    24. C-J. Dalgaard & H. Hansen, 2001. "On Aid, Growth and Good Policies," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 17-41.
    25. Bruce D. Smith & John H. Boyd, 1998. "Capital market imperfections in a monetary growth model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(2), pages 241-273.
    26. Patrick GUILLAUMONT & Lisa CHAUVET, 1999. "Aid and Performance: A Reassessment," Working Papers 199910, CERDI.
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