Should Easier Access to International CreditReplace Foreign Aid?

We examine the interaction between foreign aid and binding borrowing constraint for arecipient country. We also analyze how these two instruments affect economic growth vianon-linear relationships. First of all, we develop a two-country, two-period trade-theoreticmodel to develop testable hypotheses and then we use dynamic panel analysis to test thosehypotheses empirically. Our main findings are that: (i) better access to international credit fora recipient country reduces the amount of foreign aid it receives, and (ii) there is a criticallevel of international financial transfer, and the marginal effect of foreign aid is larger than thatof loans if and only if the transfer (loans or foreign aid) is below this critical level....