Foreign Aid Reduces Domestic Capital Accumulation and Increases Foreign Borrowing: A Theoretical Analysis

Liutang Gong and Heng-Fu Zou (hzoucema@gmail.com)

Annals of Economics and Finance, 2000, vol. 1, issue 1, 147-163

Abstract: In an infinite-horizon model with endogenous time preferences, foreign aid, foreign borrowing, and domestic capital accumulation, a permanent increase in foreign aid leads to a reduction in long-run capital accumulation, a rise in domestic consumption, and an increase in foreign borrowing. Short-run analysis shows that an initial increase in foreign aid leads to a rise in investment, and a reduction in consumption and external borrowing. On the other hand, a temporal increase in foreign aid results in an increase in consumption and foreign borrowing, and a reduction in investment.

Keywords: Foreign aid; Foreign borrowing; Capital accumulation (search for similar items in EconPapers)
JEL-codes: E2 F34 F35 F43 O1 O4 (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (10)

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Working Paper: Foreign Aid Reduces Domestic Capital Accumulation and Increases Foreign Borrowing: A Theoretical Analysis (2000)
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