The Political Economy of Conditional and Unconditional Foreign Assistance: Grants Versus Loan Rollovers

28 Pages Posted: 13 Feb 2006

See all articles by Alexandros Mourmouras

Alexandros Mourmouras

International Monetary Fund (IMF) - Policy Development and Review Department

Wolfgang Mayer

University of Cincinnati - McMicken College of Arts and Sciences - Department of Economics

Date Written: March 2004

Abstract

Improving the effectiveness of financial assistance programs is a priority of international financial institutions (IFIs). This paper examines the effectiveness of alternative assistance instruments in a dynamic political economy framework. Economic policies of the receiving country are distorted by the influence of a domestic interest group. The assistance-providing IFI aims at reducing these distortions. The IFI provides assistance either as grants or loans, and either conditionally on reducing policy distortions or unconditionally. The paper shows that, other things constant, one-time grants are more effective than loan rollovers when assistance is unconditional, but that the opposite is true when assistance is conditional.

Keywords: IMF, conditionality, common agency models, grants vs. loans

JEL Classification: E61, F33, F34

Suggested Citation

Mourmouras, Alexandros and Mayer, Wolfgang, The Political Economy of Conditional and Unconditional Foreign Assistance: Grants Versus Loan Rollovers (March 2004). IMF Working Paper No. 04/38. Available at SSRN: https://ssrn.com/abstract=878861

Alexandros Mourmouras (Contact Author)

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

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Wolfgang Mayer

University of Cincinnati - McMicken College of Arts and Sciences - Department of Economics ( email )

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Cincinnati, OH 45221-0371
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