Can Foreign Aid Accelerate Stabilization?

29 Pages Posted: 30 Dec 2000 Last revised: 1 May 2022

See all articles by Alessandra Casella

Alessandra Casella

Columbia University - Graduate School of Arts and Sciences, Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Barry Eichengreen

University of California, Berkeley; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: April 1994

Abstract

This paper studies the effect of foreign aid on economic stabilization. Following Alesina and Drazen (1991), we model the delay in stabilizing as the result of a distributional struggle: reforms are postponed because they are costly and each distributional faction hopes to reduce its share of the cost by outlasting its opponents in obstructing the required policies. Since the delay is used to signal each faction's strength, the effect of the transfer depends on the role it plays in the release of information. We show that this role depends on the timing of the transfer: foreign aid decided and transferred sufficiently early into the game leads to earlier stabilization; but aid decided or transferred too late is destabilizing and encourages further postponement of reforms.

Suggested Citation

Casella, Alessandra and Eichengreen, Barry, Can Foreign Aid Accelerate Stabilization? (April 1994). NBER Working Paper No. w4694, Available at SSRN: https://ssrn.com/abstract=254560

Alessandra Casella (Contact Author)

Columbia University - Graduate School of Arts and Sciences, Department of Economics ( email )

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Barry Eichengreen

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