Journal of Development Economics Ž . Vol. 60 1999 423–438 www.elsevier.comrlocatereconbase The ghost of financing gap: testing the growth model used in the international financial institutions William Easterly ) Room MC3-337, World Bank, 1818 H St. NW, Washington, DC 20433, USA Received 1 November 1997; accepted 1 May 1999 Abstract The Harrod–Domar growth model supposedly died long ago. Still today, economists in Ž . the international financial institutions IFIs apply the Harrod–Domar model to calculate short-run investment requirements for a target growth rate. They then calculate a ‘‘financ- ing gap’’ between the required investment and available resources and often fill the Ž. ‘‘financing gap’’ with foreign aid. The financing gap model has two simple predictions: 1 Ž. aid will go into investment one for one, and 2 there will be a fixed linear relationship between growth and investment in the short run. The data soundly reject these two predictions of the financing gap model. q 1999 Elsevier Science B.V. All rights reserved. JEL classification: E1; E22; O1; O11; O21; O4; O41 Keywords: Economic growth; Growth models; Investment; Economic development; Foreign aid 1. Introduction Ž . International financial institutions IFIs like the World Bank and International Ž . Monetary Fund IMF today use a growth model that long ago died out of the academic literature. This paper performs the unusual task of examining this ‘‘ghost’’ model in the light of theory and evidence. ) Tel.: q1-202-473-8965; fax: q1-202-522-3518; E-mail: weasterly@worldbank.org 0304-3878r99r$ - see front matter q 1999 Elsevier Science B.V. All rights reserved. Ž . PII: S0304-3878 99 00047-4