Abstract
This paper examines empirical evidence on the volatility and uncertainty of aid flows, and the main policy implications. Aid is found to be more volatile than fiscal revenues - particularly in highly aid-dependent countries - and mildly pro-cyclical in relation to activity in the recipient country. These findings imply that the current pattern of aid disbursements is welfare reducing. We also find that uncertainty about aid disbursements is large and that the information content of commitments made by donors is either very small or statistically insignificant. Policies to cope with these features of aid, as well as broader international efforts to reduce the volatility and pro-cyclicality of aid, are briefly discussed.
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