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We introduce an infinite-horizon endogenous growth framework for studying the effects of foreign aid on the economic growth in a recipient country. Aid is used to partially finance the recipient's public investment. We point out that the same rule
of aid may have very different outcomes, depending on the recipient's circumstances in terms of level of initial capital, domestic investment, efficiency in the use of aid and in public investment, etc. Foreign aid may promote growth in the recipient
country, but the global dynamics of equilibrium are quite complex (because of the non-monotonicity and steady state multiplicity). The economy may converge to a steady state or grow without bounds. Moreover, there are rooms for the divergence and a two-period cycle. We fully characterize conditions under which each scenario takes place. Our analysis contributes to the debate on the nexus between aid and economic growth and in particular on the conditionality of aid effects.
