On the Substitutability Between Foreign Aid and International Credit
FRB of St. Louis Working Paper No. 2012-043A
9 Pages Posted: 24 Oct 2012
Date Written: September 5, 2012
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: Suggested Citation