This paper studies the impact of aid volatility in a two-period model where production may occur with either a … for the modern technology to be used. The possibility of a poverty trap induced by high aid volatility is first examined … form of a first-period contingency fund) financed through taxation. An increase in aid volatility is shown to raise the …

This paper studies the impact of aid volatility in a two-period model where production may occur with either a … modern technology to be used. The possibility of a poverty trap induced by high aid volatility is first examined in a …-period contingency fund) financed through taxation. An increase in aid volatility is shown to raise the optimal contingency fund. But if …