Grants Versus Loans

September 1, 2004

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Format: Chicago

Hulya Ulku, and Tito Cordella. Grants Versus Loans, (USA: International Monetary Fund, 2004) accessed November 21, 2024

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.

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

Keywords: Adjustment effort, Aid flows, Aid policies, Asia and Pacific, Budget planning and preparation, Concessional external borrowing, Concessionality, Country policy, Empirical growth models, Grants, Loan concessionality, Loans, Policy environment, Recipient country government, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2004/161
Stock No:

WPIEA1612004
ISBN:

9781451857849
ISSN:

1018-5941

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