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Advisor, European I Department, IMF; IMF Resident Representative in Armenia; and Athens University of Economics and Business, respectively. Theodora Kosma was a Summer Intern at the IMF when this paper was written. The authors are grateful to Javier Hamann and the participants at an IMF seminar in August 2002 in which a first draft of this paper was presented, but remain responsible for all errors.
There is surprisingly little research on the economic consequences of conflict and war. One recent example is Collier (1999).
Albania, Bosnia & Herzegovina, Bulgaria, Croatia, Federal Republic of Yugoslavia (FRY), Kosovo-FRY, FYR Macedonia, Moldova, and Romania.
Referring to the reparations imposed by the Versailles Treaty on Germany at the end of WWI.
In the context of the so-called “fiscal response” literature, which tries to gauge the response of fiscal policy to aid flows, there have also been attempts to examine the impact of aid specifically on public investment. Gang and Khan (1991), Otim (1996), and McGillivray (2000), among others, find that aid tends to increase public investment, especially if it is linked to specific public investment projects. However, by relaxing the government budget constraint, aid may also diminish the tax effort. Otim (1996) finds that foreign aid tends to strengthen the government’s tax effort, but McGillivray (2000) is unable to establish a statistically significant relationship.
One exception is Gong & Zou (2001), who examine the impact of a temporary transfer of consumption goods, and find that it has no long-run impact but only influences the transitional dynamics of the economy. As in the rest of the literature, however, this one-off temporary transfer is assumed to be given without regard to the actual state of the recipient economy.
The term was first used to describe the contraction of the tradable goods sector in the Netherlands after the discovery of natural gas and the attendant inflow of foreign exchange.
There are several ways to introduce reconstruction aid into the production function. Here we opt for one of the simplest, in which the flow of reconstruction aid is just another factor of production. This assumption is similar to that in Turnovsky & Fischer (1995), who examine the impact of public investment on output and capital accumulation.
In most real world cases, reconstruction aid flows through the government sector. Our model can easily be expanded to incorporate a government sector by assuming that R is the amount of public reconstruction spending, which is in turn financed by foreign aid and taxes R = A + T. As long as taxes are non-distortionary (a standard assumption) and the government does not borrow, this expansion would add a layer of notation to the model without affecting the results. To keep it simple, therefore, we ignore the government sector.
Although in this specification of the model the determinant of the coefficient matrix is negative because κt > κn the stability properties of this dynamic system in general do not
depend on the assumption regarding the relative capital intensities of the two sectors. This assumption, however, influences the dynamic adjustment of the system.
At the neighborhood of the steady state, the terms corresponding to the dynamic evolution of the system are zero.