• Selected
• Entire List

Abstract:
This paper examines the link between foreign aid, economic growth, and welfare in a small open economy. External transfers impinge on the recipient's macroeconomic performance by affecting resource allocation decisions and relative prices. The endogeneity of the labor-leisure choice and the adjustment of the real wage rate play a crucial role in the propagation of foreign aid shocks. Another crucial determinant of the efficacy of foreign aid is externalities associated with the public good that the aid helps finance. The impact of tied and untied aid on the recipient government's intertemporal fiscal balance is also considered. Finally, the transitional adjustment to a foreign aid shock is shown to depend crucially on the elasticity of substitution in production and the relative importance of the labor-leisure choice in utility.

Foreign aid, International transfers, Endogenous labor, Economic growth, Public investment

Abstract:
This paper examines the link between foreign aid, economic growth, and welfare in a small open economy. External transfers impinge on the recipient's macroeconomic performance by affecting resource allocation decisions and relative prices. The endogeneity of the labor-leisure choice and the adjustment of the real wage rate play a crucial role in the propagation of foreign aid shocks. Another crucial determinant of the efficacy of foreign aid is externalities associated with the public good that the aid helps finance. The impact of tied and untied aid on the recipient government's intertemporal fiscal balance is also considered. Finally, the transitional adjustment to a foreign aid shock is shown to depend crucially on the elasticity of substitution in production and the
relative importance of the labor-leisure choice in utility.

Foreign aid, International transfers, Endogenous labor, Economic growth, Public investment

Abstract:
The choice between private and government provision of a productive public good like infrastructure (public capital) is examined in the context of an endogenously growing open economy. The accumulation of public capital need not require government provision, in contrast to the standard assumption in the literature. Even with an efficient government, the relative costs and benefits of government and private provision depend crucially on the economy's underlying structural conditions and borrowing constraints in international capital markets. Countries with limited substitution possibilities and large production externalities may benefit from governments encouraging private provision of public capital through targeted investment subsidies. On the other hand, countries with flexible substitution possibilities and relatively smaller externalities may benefit either from governments directly providing public capital, or from regulation of private providers. The transitional dynamics are also shown to depend on the underlying elasticity of substitution and the size of the production externality.

Private provision, Public capital, Subsidies, Regulation, Distortionary taxation, Growth

Abstract:
This paper examines fungibility as a possible explanation for the missing link between foreign aid and economic growth. The composition of aid plays a crucial role in determining the composition of government spending and, consequently, the magnitude of fungibility and its impact on growth. Embedding fungibility as an equilibrium outcome in an endogenous growth framework, we show that the substitution away from domestic government investment is higher than from government consumption. This leads to a reduction in domestic productive public spending and completely offsets any positive impact that aid might have on growth. The main predictions of the model are tested using a panel dataset of 67 countries for 1972-2000. We find strong evidence of fungibility at the aggregate level: almost 70 percent of total aid is fungible in our sample. We also find that investment aid is more fungible than other categories of aid. In the presence of fungibility, there is no statistically significant relationship between foreign aid and economic growth.

foreign aid, economic growth, fungibility, fiscal policy

Abstract:
This paper studies the differences between economies where infrastructure is privately provided and those in which the government is the sole provider. Endogenous capital utilization decisions and their role in determining market prices for private capital and infrastructure provide a critical channel through which fiscal policy affects macroeconomic performance. The mode of infrastructure provision affects the degree to which capital utilization decisions can be internalized by the private sector, thereby impacting on an economy's response to fiscal shocks. A targeted subsidy to private providers of infrastructure is unambiguously preferable to direct government provision (in terms of welfare), irrespective of how the subsidy or expenditure is financed or externalities such as congestion. In fact, the case for private provision is much stronger in economies characterized by high levels of congestion in infrastructure services. An income tax is more distortionary when both private capital and infrastructure are privately provided, than in the case where the government assumes responsibility for infrastructure provision. The choice between private and government provision also has a crucial effect on the design of optimal fiscal policy.

Infrastructure Provision, Capital Utilization, User Cost, Fiscal Policy, Public Capital, Economic Growth

Abstract:
This paper examines the effect of fiscal policy and provision of productive public goods on the dynamics of growth and inequality. A model is developed in which public infrastructure is both an engine of growth and a determinant of the distributions of wealth, income, and welfare. The design of government spending and taxation policies is a critical source of (i) the growth-inequality relationship, and (ii) the efficiency-equity trade-off, both in transition as well as the steady-state. For example, growth-enhancing government spending policies can generate sharp intertemporal trade-offs in the evolution of income inequality: inequality falls in the short run, but gradually increases over time to worsen in the long-run. The existence of an efficiency-equity trade-off depends on the taxation policy used to finance government spending. In this respect, the capital income tax serves as an effective tool of egalitarian redistribution. The redistributive effects of the consumption tax as an alternative to the more conventional labor income tax are also highlighted.

Infrastructure, Public investment, Inequality, Equity, Distribution, Economic Growth, Fiscal Policy

Abstract:
The standard procedure for analyzing transitional dynamics in non-linear macro models has been to employ linear approximations. This paper investigates the reliability of this procedure in evaluating the dynamic adjustments to policy changes or structural shocks. We analyze this issue using the example of a Ramsey growth model, with two alternative specifications of productive government spending. If government expenditure is introduced as a flow and the dynamic adjustment is fast, linearization may be a reasonably good approximation of the true dynamics even for fairly large policy shocks. If government expenditure assumes the form of a stock, leading to more sluggish adjustment, linearization is more problematic. It may yield misleading predictions, both qualitatively and quantitatively. These errors occur at the beginning of the transition and weigh heavily in welfare calculations. The implications for these errors for temporary shocks and the speed of convergence are also considered.

Public expenditure, growth, nonlinearities, welfare analysis

Abstract:
We examine the impact of fiscal policy on macroeconomic performance when public goods play a dual role by simultaneously providing both productive and utility services to the private sector. When these services are subject to congestion, a consumption tax is distortionary, generating a dynamic adjustment that contrasts an income tax. The design of optimal fiscal policy demonstrates the possibilities for using both income- and consumption-based fiscal instruments as opposed to relying on the income tax alone. In correcting for congestion, an income tax-consumption subsidy combination is the preferred policy when factor-substitutability in production is limited. On the other hand, an increase in the elasticity of substitution in production raises the efficacy of a consumption tax as an alternative to the income tax. Not internalizing the dual benefits of public goods might lead to misleading predictions regarding the effect of public policies on welfare.

Public Goods, Congestion, Consumption-based fiscal instruments, Growth, Welfare

Abstract:
This paper examines the significance of the time path of a given productivity increase on growth and inequality. We show that whereas the time path impacts only the transitional path of aggregate quantities and has no effect on their ultimate steady-state levels, it has both transitional and permanent consequences for wealth and income distribution. As a result, the growth-inequality tradeoff generated by a given discrete increase in productivity contrasts sharply with that obtained when the same ultimate productivity increase is acquired gradually. This is true both in transition and across steady states. We show that a gradual productivity change can generate a Kuznets-type inverted U-shaped relationship between inequality and per-capita income. The distance from the technology frontier is also shown to have important implications for both the magnitude and persistence of inequality. Finally, our results suggest that economies with similar aggregate structural characteristics may have very different outcomes for income and wealth inequality, depending on the intrinsic nature of the productivity growth path.

Growth, Income and Wealth Inequality, Kuznets' Curve

Abstract:
We examine whether different aspects of social divisions help explain the wide variation in access to tap water across rural India. Using data for 436 rural districts from the 2001 Census of India, we find that communities that are heterogeneous in terms of caste (within the majority Hindu religion) are likely to have lower access to tap water than correspondingly homogeneous communities. By contrast, communities that are fragmented across religions are likely to have higher access to tap water than correspondingly homogeneous communities. Therefore, though both heterogeneity within and across religions matter for access to public goods, they may work in opposite directions. The source of tap water is also important in understanding the role of social factors: while caste-based fragmentation matters for tap water access within the residence, it is the concentration of individual caste groups that matter for tap water outside the residence. These results indicate that studies that use aggregate measures of social fragmentation may not convey useful information regarding the design of public policy.

Public goods, Social fragmentation, Water, Public policy, India

Abstract:
The paper develops a theoretical framework for understanding the mechanism through which foreign aid affects macroeconomic performance. The authors find that the long-run impact of an aid program and the nature of the transitional dynamics it generates depend crucially on (i) the elasticity of substitution in production, (ii) whether the aid flow is tied to investment activity or not, (iii) how the recipient government chooses to react to the flow of external assistance, and (iv) whether the aid program is permanent or temporary. Structural characteristics of the recipient are important in determining the extent to which external assistance can aid growth and welfare.

Abstract:
This paper develops a theoretical framework for understanding the mechanism through which foreign aid affects macroeconomic performance. We find that the long-run impact of an aid program and the nature of the transitional dynamics it generates depend crucially on (i) the elasticity of substitution in production, (ii) whether the aid flow is tied to investment activity or not, (iii) how the recipient government chooses to react to the flow of external assistance, and (iv) the aid program is permanent or temporary. Structural characteristics of the recipient economy are important in determining the extent to which external assistance can aid growth and welfare.

Foreign Aid, External Assistance, Public Investment, Public Capital, Elasticity of Substitution, Growth

Abstract:
This paper undertakes a numerical analysis of the effects of changes in the tax rates on domestic and foreign capital income in a stochastically growing open economy under recursive preferences, in which the rate of time preference, epsilon, and the coefficient of risk aversion, R, can be set independently. The responses of the equilibrium growth rate, its volatility, and welfare to changes in the tax changes considered are highly sensitive to the independent variations in both epsilon and R. Consequently, the errors committed by using the conventional constant elasticity utility function, even for small violations of the compatibility condition (R = 1/epsilon) can be significant, suggesting that this functional form should be employed with caution.

Recursive Preferences, Stochastic Growth, Time Preference, Risk Aversion, Volatility, Tax Policy

Abstract:
This paper provides a numerical analysis of the likely benefits from adopting alternative ways of reducing the projected fiscal surplus (as of the summer 2001) in the United States economy. Calibrating a small growth model, our results suggest that investing the surplus in public capital is likely to yield the greatest long-run welfare gains, although decreasing the capital income tax is only marginally inferior. Both these options dominate increasing government consumption expenditure or decreasing the tax on labor income. By shifting resources from consumption toward capital the two superior policies involve sharp intertemporal tradeoffs in welfare; significant short-run welfare losses are more than compensated by large long-run welfare gains. By contrast, the two inferior options are gradually welfare-improving through time. A crucial factor in determining the benefits of reducing the government surplus through spending is the size of the government sector relative to the social optimum. We find that the second-best optimum is to increase both forms of government expenditure to their respective social optima, while at the same time restructuring taxes by reducing the tax on capital and raising the tax on wage income to achieve the targeted reduction in the surplus.

Deficit, Public Policy, Public Capital, Surplus

Abstract:
We contrast the effects of a transfer tied to investment in public infrastructure from a traditional pure transfer. The latter has no growth or dynamic consequences; it is always welfare improving, the gains increasing with the stock of government debt and the benefits of debt reduction. A tied transfer generates dynamic adjustments, as public capital is accumulated in the recipient economy. Its long-run growth and welfare effects depend upon the initial stock of infrastructure, as well as co-financing arrangements. These contrasts also apply to temporary transfers, particularly the transitional dynamics. A temporary pure transfer has only modest short-run growth effects and leads to a permanent deterioration of the current account, while a productive transfer has significant impacts on short-run growth, leading to permanent improvements in key economic variables including the current account.

Foreign aid, growth, infrastructure, public capital, public investment, international transfers

Abstract:
This paper examines the implications of capital utilization for the dynamics of growth and convergence. Optimal decisions by economic agents regarding the utilization of capital lead to empirically plausible speeds of convergence in one-sector models of economic growth, thereby providing a simpler alternative to the adjustment costs and multiple capital goods frameworks. The sensitivity of depreciation to capital utilization leads to less than full utilization of capital by the economic agent, a result consistent with empirical facts. The relationship between the rate of depreciation and capital utilization, embodied in the variable marginal benefits and costs of capital accumulation along the transition path, plays a crucial role in slowing down the speed of convergence to the steady state. By assuming a constant depreciation rate and full capital utilization, standard growth models may be significantly overstating the magnitude of the steady-state equilibrium. Finally, differences across countries in the extent to which agents internalize the capital utilization decision along the transition path may lead to differences in the speed of adjustment tothe steady-state equilibrium, even for countries that have similar initial and terminal conditions.

Economic Growth, Capital utilization, Speed of Convergence, Depreciation, User Cost