IMF Economic Review

, Volume 65, Issue 2, pp 397–425 | Cite as

Virtuous Circles and the Case for Aid

Article

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.

JEL

F35 O40 

Notes

Acknowledgments

We are grateful to Pierre-Olivier Gourinchas and an anonymous referee for helpful comments which have improved the paper. We are responsible for its remaining shortcomings. Carter thanks the British Academy for financial support under award PF110079. Temple thanks the British Academy for financial support from a Mid-Career Fellowship.

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Copyright information

© International Monetary Fund 2016

Authors and Affiliations

  1. 1.Overseas Development InstituteLondonUnited Kingdom
  2. 2.University of BristolBristolUnited Kingdom

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