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Foreign Aid and Fiscal Behavior in a Bounded Rathionality Model: Different Policy Regimes

  • Ira N. Gang

    ()

    (Rutgers University)

  • Haider Ali Khan

    (GSIS, U of Denver and ADB)

We examine how the source of foreign aid affects the composition of the recipient government's spending. Does the source of aid -- bilateral or miltilateral -- influence ricipient policy-makers' choice between development and nondevelopment expenditure? We depart from previous literature by introducing strong asymmetries in policy-maker's preferences. With financial constraints set by foreign aid and domestic revenues, this formalization allows us to model and estimate the fiscal behavior of government policy-makers in the presense of foreign aid.

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File URL: ftp://snde.rutgers.edu/Rutgers/wp/1998-12.pdf
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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 199812.

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Date of creation: 10 Jun 1998
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Handle: RePEc:rut:rutres:199812
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  1. Pack, Howard & Pack, Janet Rothenberg, 1993. "Foreign Aid and the Question of Fungibility," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 258-65, May.
  2. Cashel-Cordo, Peter & Craig, Steven G, 1997. "Donor Preferences and Recipient Fiscal Behavior: A Simultaneous Analysis of Foreign Aid," Economic Inquiry, Western Economic Association International, vol. 35(3), pages 653-71, July.
  3. Maizels, Alfred & Nissanke, Machiko K., 1984. "Motivations for aid to developing countries," World Development, Elsevier, vol. 12(9), pages 879-900, September.
  4. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-37, April.
  5. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-41, September.
  6. Khan, Haider Ali & Hoshino, Eiichi, 1992. "Impact of foreign aid on the fiscal behavior of LDC governments," World Development, Elsevier, vol. 20(10), pages 1481-1488, October.
  7. Gang, Ira N. & Ali Khan, Haider, 1990. "Foreign aid, taxes, and public investment," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 355-369, November.
  8. Frey, Bruno S. & Schneider, Friedrich, 1986. "Competing models of international lending activity," Journal of Development Economics, Elsevier, vol. 20(2), pages 225-245, March.
  9. Heller, Peter S, 1975. "A Model of Public Fiscal Behavior in Developing Countries: Aid, Investment, and Taxation," American Economic Review, American Economic Association, vol. 65(3), pages 429-45, June.
  10. Pack, Howard & Pack, Janet Rothenberg, 1990. "Is Foreign Aid Fungible? The Case of Indonesia," Economic Journal, Royal Economic Society, vol. 100(399), pages 188-94, March.
  11. Sengupta, J K, 1970. "Optimal Stabilization Policy with a Quadratic Criterion Function," Review of Economic Studies, Wiley Blackwell, vol. 37(1), pages 127-45, January.
  12. Binh, Tran-Nam & McGillivray, Mark, 1993. "Foreign aid, taxes and public investment A comment," Journal of Development Economics, Elsevier, vol. 41(1), pages 173-176, June.
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