Virtuous Circles and the Case for Aid

Paddy Carter, Jon Temple

Research output: Contribution to journalArticle (Academic Journal)

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Abstract

It is sometimes argued that foreign aid leads to a virtuous circle in which growth becomes self-reinforcing. We study two versions of this argument, using a modified neoclassical growth model in which the effects of parameter changes and capital accumulation are amplified. Simulations are used to quantify the welfare benefits from aid transfers. We find that, contrary to expectations, amplification makes only a modest difference to the welfare benefits from aid. This is true even when aid allows a faster exit from a vicious circle or poverty trap.
Original languageEnglish
Number of pages29
JournalIMF Economic Review
Early online date16 Nov 2016
DOIs
Publication statusE-pub ahead of print - 16 Nov 2016

Keywords

  • Foreign aid
  • amplification effects
  • virtuous circles
  • vicious circles

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