Abstract—Fiscal policy in low-income countries plays a key role in helping to make the development process effective. Foreign aid is central to that policy, because it represents one of the main sources of revenue in many less developed countries. Understanding the way in which aid flows can influence fiscal variables has emerged as an important issue in recent debates over the effectiveness of aid and the formulation of fiscal policy. This paper develops and estimates a fiscal response model with anticipated aid, being Nicaragua the case study selected. The principal assumption is that some aid can be anticipated by the recipient government in its budgetary plans. The model estimation suggests that aid is mainly used to deal with the debt problem and to reduce borrowing, and has little impact on investment. The results also present different responses according to the various types of aid (grants and loans).
Index Terms—Fiscal response, aid effectiveness, Nicaragua.
G. -D. Mariola and R. -J. Fernando are with the Department of Applied Economics, Faculty of Economics and Business Studies, University of Burgos, Spain (email@example.com; firstname.lastname@example.org).
Cite: Mariola Gozalo-Delgado and Fernando Rueda-Junquera, "Foreign Aid and Recipient Government Behavior in Nicaragua," International Journal of Trade, Economics and Finance vol. 2, no. 6, pp. 462-468, 2011.