Grants Versus Loans
IMF Working Paper No. 04/161
31 Pages Posted: 15 Sep 2004
There are 2 versions of this paper
Date Written: September 1, 2004
Abstract
Under what conditions should grants be preferred to loans? To answer this question, we present a simple model a la Krugman (1988) and show that, for any given level of developmental assistance, the optimal degree of loan concessionality is positively associated with economic growth if countries are poor, have bad policies, and high debt obligations. We then test our model by estimating a modified growth model for a panel of developing countries, and find evidence supporting our predictions. Finally, we assess the determinants of current aid allocations and find that the degree of concessionality is negatively correlated with countries' levels of development.
Keywords: Aid policies, grants, loans, concessionality, empirical growth models
JEL Classification: F35, H63, O40
Suggested Citation: Suggested Citation
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