Using time-series data for India, we test the foreign aid-public investment hypothesis. Behavioral equations derived from a maximizing framework are estimated after correcting for econometric and data inadequacies of earlier models. The results confirm earlier findings regarding the negative relationship between taxes and government investment in the presence of aid. However, in contrast to the earlier work, we find that grants and loans generally go into development projects with no leakages into consumption. Moreover, bilateral aid actually pulls resources out of consumption and puts them into development projects.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics