The paper examines the effects of aid and its volatility on consumption, investment, and the structure of production in the context of an intertemporal two-sector general equilibrium model, calibrated using data for aid-dependent countries in Africa. A permanent flow of aid mainly finances consumption rather than investment--consistent with the historical failure of aid inflows to translate into sustained growth. Large aid flows are associated with higher real exchange rates and smaller tradable sectors because aid is a substitute for tradable consumption. Aid volatility results in substantial welfare losses, providing a motivation for recent discussions of aid architecture stressing the need for greater predictability of aid. These results are also consistent with evidence from cross-country regressions of manufactured exports, presented later in the paper.