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

Liutang Gong and Heng-Fu Zou ()

No 8, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

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)
Pages: 17 pages
Date: 1999-05, Revised 2000-04
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published in Annals of Economics and Finance, May 2000, pages 147-163

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