On the Substitutability Between Foreign Aid and International Credit

FRB of St. Louis Working Paper No. 2012-043A

9 Pages Posted: 24 Oct 2012

See all articles by Subhayu Bandyopadhyay

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

American University of Sharjah - Economics Department

Date Written: September 5, 2012

Abstract

We examine the effect of relaxing a binding borrowing constraint for a recipient country on the amount of foreign aid it receives. We do so by developing a two-country, two-period trade-theoretic model. The relaxation of the borrowing constraint reduces the flow of foreign aid, suggesting that the donor views developing nations' access to international credit markets as a substitute for foreign aid.

Keywords: foreign aid, borrowing constraint, fungibility, public input

JEL Classification: F35, O10

Suggested Citation

Bandyopadhyay, Subhayu and Lahiri, Sajal and Younas, Javed, On the Substitutability Between Foreign Aid and International Credit (September 5, 2012). FRB of St. Louis Working Paper No. 2012-043A. Available at SSRN: https://ssrn.com/abstract=2166049 or http://dx.doi.org/10.2139/ssrn.2166049

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

American University of Sharjah - Economics Department ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

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