The response of an economy to a windfall of foreign exchange (be it aid or natural resource revenues) is often constrained by absorptive capacity. We provide a micro-founded analysis of absorption constraints, based on the idea that expanding the economy’s capital stock (in aggregate or...

This paper introduces a framework for studying the optimal dynamic allocation of foreign aid among multiple recipients. We pose the problem as one of weighted global welfare maximization. A donor in the North chooses an optimal path for international transfers, anticipating that consumption and...

We introduce a new `supply-push' instrument for foreign aid, to be used together with an instrumental variable estimator that filters out unobserved common factors. We use this instrument to study the effects of aid on macroeconomic ratios, and especially the ratios of consumption, investment,...

This paper studies the effect of foreign aid on economic stabilization. Following Alesina and Drazen (1991), we model the delay in stabilizing as the result of a distributional struggle: reforms are postponed because they are costly and each distributional faction hopes to reduce its share of...

We develop a political-economic model of aid fungibility. A donor country gives aid to a recipient government for the benefit of a target group. However, the recipient government accepts political contributions from a lobby group not targeted by the donor and transfers a fraction of the aid to...

The relation between IMF conditionality and country ownership of assistance programs is considered from a political economy perspective, focusing on the question of why conditionality is needed if it is in a country’s best interests to undertake the reform program. It is argued that...

Why should multilateral lending exist in a world where private capital markets are well developed and governments have their own bilateral aid programmes? If lending by the World Bank, IMF, and regional development banks has an independent rationale, it must rest on advantages generated by the...

Foreign aid has been on a downward trend since at least the early eighties. Despite the commitments of donor governments, the GDP share of foreign aid for DAC countries has fallen to slightly more than 0,2% in the early part of this decade. The purpose of this paper is to explore the macro...

We investigate the effects of short-term political motivations on the effectiveness of foreign aid. Donor countries’ political motives might reduce the effectiveness of conditionality, channel aid to inferior projects, reduce the aid bureaucracy’s effort, and change the power structure in...

Investment in research and development (R&D) affects a country's total factor productivity. Recently new theories of economic growth have emphasized this link and have also identified a number of channels through which a country's R&D affects total factor productivity of its trade partners....