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The Role of Foreign Aid and the Foreign Exchange Constraint in Growth: Some Extensions

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  • Goyal, Ashima

Abstract

An analytical framework that draws both upon the two-gap models and work on non-market clearing short-run constrained equilibria, and its application to long-run growth, is applied to find out when the contribution of foreign resources to growth is maximum. A theoretically consistent treatment of foreign inflows, starting from consumer and firm decisions, shows that foreign inflows need not have a negative coefficient in a behavioural savings function. A model with a saving function, an investment function and an import constraint generates a demand constrained short-run equilibrium in addition to savings and trade and capacity constrained equilibria. Considerations of dynamics and long-run persistence of constraints and equilibria, show foreign inflows make the maximum contribution, when the resource and trade constraints are binding, since rise in output and domestic savings results in the maximum increase in investment. Simulations show such a virtuous growth path was reversed in the sixties and seventies in India. A sudden fall in inflows reduced the slope and intercept of the investment function and the economy shifted to a stagflationary trajectory.

Suggested Citation

  • Goyal, Ashima, 1993. "The Role of Foreign Aid and the Foreign Exchange Constraint in Growth: Some Extensions," MPRA Paper 73179, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:73179
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    References listed on IDEAS

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    1. Bacha, Edmar L., 1990. "A three-gap model of foreign transfers and the GDP growth rate in developing countries," Journal of Development Economics, Elsevier, vol. 32(2), pages 279-296, April.
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    Cited by:

    1. Ashima Goyal, 1994. "Industrial Pricing and Growth Fluctuations in India," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 29(1), pages 13-32, January.
    2. Goyal, Ashima, 1997. "Foreign Capital Flows, Real Exchange and Interest Rates: An Analytical Framework," MPRA Paper 73537, University Library of Munich, Germany.
    3. Goyal, Ashima, 1998. "Do Foreign Inflows Let Expectations Dominate History?," MPRA Paper 76790, University Library of Munich, Germany.

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    More about this item

    Keywords

    Two-gap models; Constrained equilibira; Foreign exchange constraint; Dynamics; Growth paths;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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