Does foreign aid delay stabilization

Hannah Hörisch ()
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Hannah Hörisch: Uni München, Seminar for economic theory, Postal: Ludwigstraße 28 (Rgb), D-80539 Munich
Authors registered in the RePEc Author Service: Hannah Schildberg-Hoerisch ()

No 04-24, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: This paper addresses the question how the expectation of unconditional external shocks like foreign aid increase or decrease saving and, thus, accelerate or delay macroeconomic stabilizations. We build on Casella and Eichengreen (1996) who first used Alesina and Drazen's (1991) war-of-attrition model to investigate the consequences of anticipation of foreign aid on the expected date of stabilization. Casella and Eichengreen's main result, namely that aid that is announced or disbursed after critical dates will delay stabilization, will be shown to be based on an invalidly modified equilibrium condition. A correct incorporation of anticipated foreign aid in the war-of-attrition model yields the result that aid unambiguously accelerates stabilization.

Pages: 64 pages
Date: 2004-06-18
New Economics Papers: this item is included in nep-afr
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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Working Paper: Does foreign aid delay stabilization (2004)
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