The ghost of financing gap: Testing the growth model used in the international financial institutions

William Easterly

    Research output: Contribution to journalArticlepeer-review

    Abstract

    The Harrod-Domar growth model supposedly died long ago. Still today, economists in the international financial institutions (IFIs) apply the Harrod-Domar model to calculate short-run investment requirements for a target growth rate. They then calculate a 'financing gap' between the required investment and available resources and often fill the 'financing gap' with foreign aid. The financing gap model has two simple predictions: (1) aid will go into investment one for one, and (2) there will be a fixed linear relationship between growth and investment in the short run. The data soundly reject these two predictions of the financing gap model.

    Original languageEnglish (US)
    Pages (from-to)423-438
    Number of pages16
    JournalJournal of Development Economics
    Volume60
    Issue number2
    DOIs
    StatePublished - Dec 1999

    Keywords

    • Economic development
    • Economic growth
    • Foreign aid
    • Growth models
    • Investment

    ASJC Scopus subject areas

    • Development
    • Economics and Econometrics

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