Aid and Vulnerability

Managing and identifying risks are a key challenge for Low Income Countries (LICs), which are extremely vulnerable to exogenous shocks. However, the use of risk management tools by developing countries is quite limited. The paper discusses in which ways aid could strengthen the capacity of LICs to deal with vulnerability to external shocks and to manage capital flows. We provide some novel empirical evidence on the potential role of aid as output stabilizer and shock absorber in recipient countries, and on aid unpredictability.