Aid Allocation, Growth and Welfare with Productive Public Goods

Pierre-Richard Agénor () and Devrim Yilmaz

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The Univeristy of Manchester

Abstract: This paper develops an open-economy intertemporal growth model with endogenous relative prices and an imperfect world capital market. The government provides two categories of public services, infrastructure and health, which are both productive. Externalities associated with infrastructure in the production of health services are also accounted for. The model is calibrated for a "typical" low-income country and used to examine the growth and welfare effects of both permanent and temporary, tied and untied, increases in aid. Dynamic trade-offs between the short- and the long-run effects of aid shocks on growth, welfare, and the real exchange rate are shown to depend crucially on the composition of aid flows.

Date: 2008
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Persistent link: http://EconPapers.repec.org/RePEc:man:cgbcrp:95

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