Grants Versus Loans

Author/Editor:

Hulya Ulku ; Tito Cordella

Publication Date:

September 1, 2004

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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 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.

Series:

Working Paper No. 2004/161

Subject:

Aid flows Budget planning and preparation Concessional external borrowing Environment External debt Financial institutions Foreign aid Loans Public financial management (PFM)

English

Publication Date:

September 1, 2004

ISBN/ISSN:

9781451857849/1018-5941

Stock No:

WPIEA1612004

Pages:

31

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