CAN FOREIGN-AID ACCELERATE STABILIZATION

This paper studies the effect of foreign aid on economic stabilisation . Following Alesina and Drazen (1991), we model the delay in stabilisi ng as the result of a distributional struggle. Since the delay is used to signal each faction's strength, the effect of the transfer depends on the role it plays in the release of information. We show that this role depends on the timing of the transfer: foreign aid decided and t ransferred sufficiently early into the game leads to earlier stabilisa tion; but aid decided or transferred too late is destabilising and enc ourages further postponement of reforms.