Grants vs. Loans

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Abstract: Under what conditions should grants be preferred to loans? To answer this question, we present a simple model à la Krugman (1988) and show that, for anygiven level of development assistance, higher concessionalityis good for growth if countries are poor, have bad policies, and have high debt obligations. We then test our model by estimating a modified growth model for a panel of developing countries, and find evidence supporting most of our predictions. [JEL F35, H63, O40]