Does foreign aid delay stabilization

This paper addresses the question how the expectation of unconditional external shocks like foreign aid increase or decrease saving and, thus, accelerate or delay macroeconomic stabilizations. We build on Casella and Eichengreen (1996) who first used Alesina and Drazen's (1991) war-of-attrition model to investigate the consequences of anticipation of foreign aid on the expected date of stabilization. Casella and Eichengreen's main result, namely that aid that is announced or disbursed after critical dates will delay stabilization, will be shown to be based on an invalidly modified equilibrium condition. A correct incorporation of anticipated foreign aid in the war-of-attrition model yields the result that aid unambiguously accelerates stabilization.