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Foreign aid, domestic capital accumulation, and foreign borrowing

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  • Cui, Xiaoyong
  • Gong, Liutang

Abstract

In an infinite-horizon model with Marshallian time preferences, foreign aid, foreign borrowing, and domestic capital accumulation, this paper reexamines the effects of foreign aid on domestic capital accumulation and foreign borrowing. Comparative static analysis shows that a permanent increase in foreign aid leads to an increase in both long-run capital accumulation and domestic consumption, but a decrease in foreign borrowing. Short-run analysis shows that both a permanent and a temporary increase in foreign aid makes people more patient, which leads to a rise in investment and a reduction in foreign borrowing initially.

Suggested Citation

  • Cui, Xiaoyong & Gong, Liutang, 2008. "Foreign aid, domestic capital accumulation, and foreign borrowing," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 1269-1284, September.
    • Handle: RePEc:eee:jmacro:v:30:y:2008:i:3:p:1269-1284
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    4. Mayr, Karin, 2010. "Optimal Deficit and Debt in the Presence of Foreign Aid," World Development, Elsevier, vol. 38(1), pages 19-27, January.

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