Abstract:
Abstract: In a developing economy, the impact of foreign aid could have different
implications depending on the political stability of the country. Viewed through an
Overlapping Generations Model of two periods, we observe the effects of a one-time
foreign aid on economic growth of the country. It is seen that political stability plays
a major role in the future growth. A politically stable country has the incentive to
invest the aid received into enhancing future production. However, a politically
unstable country would find it more opportune to spend the aid on current
consumption and thereby reducing potential future growth.
