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Should Easier Access to International Credit Replace Foreign Aid?

44 Pages Posted: 23 Oct 2011  

Subhayu Bandyopadhyay

Federal Reserve Bank of St. Louis - Research Division; IZA Institute of Labor Economics; West Virginia University

Sajal Lahiri

Southern Illinois University Carbondale - Department of Economics

Javed Younas

affiliation not provided to SSRN

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.

Keywords: foreign aid, foreign loans, borrowing constraint, economic growth, fungibility, public input

JEL Classification: F34, F35, O11, O16

Suggested Citation

Bandyopadhyay, Subhayu and Lahiri, Sajal and Younas, Javed, Should Easier Access to International Credit Replace Foreign Aid?. IZA Discussion Paper No. 6024. Available at SSRN: https://ssrn.com/abstract=1948020

Subhayu Bandyopadhyay (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
PO Box 442
St. Louis, MO 63011
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

West Virginia University ( email )

Morgantown, WV 26506-6025
United States
304-293-7879 (Phone)
304-293-7061 (Fax)

Sajal Lahiri

Southern Illinois University Carbondale - Department of Economics ( email )

MC 415
1000 Faner Drive
Carbondale, IL 62901
United States

Javed Younas

affiliation not provided to SSRN ( email )

No Address Available

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