Virtuous Circles and the Case for Aid

37 Pages Posted: 20 Oct 2015

See all articles by Paddy Carter

Paddy Carter

University of Bristol

Jonathan R.W. Temple

Centre for Economic Policy Research (CEPR)

Date Written: October 2015

Abstract

It is sometimes argued that foreign aid leads to a virtuous circle in which growth becomes self-reinforcing. We study two versions of this argument, using a modified neoclassical growth model in which the effects of parameter changes and capital accumulation are amplified. Simulations are used to quantify the welfare benefits from aid transfers. We find that, contrary to expectations, amplification makes only a modest difference to the welfare benefits from aid. This is true even when aid allows a faster exit from a vicious circle or poverty trap.

Keywords: Amplification effects, Foreign Aid, Vicious circles, Virtuous circles

JEL Classification: F35, O40

Suggested Citation

Carter, Paddy and Temple, Jonathan R.W., Virtuous Circles and the Case for Aid (October 2015). CEPR Discussion Paper No. DP10880. Available at SSRN: https://ssrn.com/abstract=2676566

Paddy Carter (Contact Author)

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Jonathan R.W. Temple

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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