Optimal Deficit and Debt in the Presence of Foreign Aid

Karin Mayr-Dorn

World Development, 2010, vol. 38, issue 1, 19-27

Abstract: Summary External revenue in the form of foreign aid constitutes an important component of the government's budget constraint in many developing countries. We derive optimal public spending--and the resulting optimal deficit and debt--in an optimal control framework when the government seeks to maximize the utility of constituents in the presence of external revenue that cannot be influenced by the government directly but is contingent on public revenue and debt. We find that in this context, a policy of running budget deficits and accumulating debt becomes optimal. In simulations, we characterize the size and the path dependency of the optimal deficit and debt.

Keywords: optimal; budget; deficits; optimal; control; foreign; aid; HIPC (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0305-750X(09)00077-1
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:wdevel:v:38:y:2010:i:1:p:19-27

Access Statistics for this article

World Development is currently edited by O. T. Coomes

More articles in World Development from Elsevier
Bibliographic data for series maintained by Catherine Liu ().