This paper uses a new database on foreign aid to examine the relationships among foreign aid, economic policies, and growth per capita GDP. We find that aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies but has little effect in the presence of poor policies. Good policies are ones that are themselves important for growth. The quality of policy has only a small impact on the allocation of aid. Our results suggest that aid would be more effective if it were more systematically conditioned on good policy.
Ontario for their helpful comments and suggestions. This paper is part of NBER's research program in Economic Flucwations. Any opinions expressed axe those of the authors and not those of the National Bureau of Economic Research.
This paper is a substantial revision to "Assessing the Effects of Fiscal Shocks" which appeared as NBER working paper no. 7459. We would like to thank Lawrence J. Christiano and Lars Hansen for helpful conversations. In addition we would like to thank several referees for useful comments.
Some booms in housing prices are followed by busts. Others are not. It is generally di¢ cult to …nd observable fundamentals that are useful for predicting whether a boom will turn into a bust or not. We develop a model consistent with these observations. Agents have heterogeneous expectations about long-run fundamentals but change their views because of "social dynamics." Agents with tighter priors are more likely to convert others to their beliefs. Boom-bust episodes typically occur when skeptical agents happen to be correct. The booms that are not followed by busts typically occur when optimistic agents happen to be correct.J.E.L. Classi…cation: E32.
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