Grants Versus Loans

IMF Working Paper No. 04/161

31 Pages Posted: 15 Sep 2004

See all articles by Tito Cordella

Tito Cordella

Johns Hopkins University - Bologna Center

Hulya Ulku

The University of Manchester - Institute for Development Policy and Management (IDPM); World Bank

Multiple version iconThere 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

Cordella, Tito and Ulku, Hulya, Grants Versus Loans (September 1, 2004). IMF Working Paper No. 04/161, Available at SSRN: https://ssrn.com/abstract=590125 or http://dx.doi.org/10.2139/ssrn.590125

Tito Cordella (Contact Author)

Johns Hopkins University - Bologna Center ( email )

Via Belmeloro 11
40126 Bologna
Italy

Hulya Ulku

The University of Manchester - Institute for Development Policy and Management (IDPM) ( email )

Manchester M13 9GH
United Kingdom

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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