Foreign aid’s effectiveness in promoting economic growth remains controversial.We examine the impact of aid on economic growth, controlling for the volatility of aid using a panel analysis encompassing 155 countries over the period 1966-2001. We find aid to have a strongly positive impact on economic growth, but volatility of aid flows is negatively related to growth. Since we also find that volatility of aid is positively correlated with the volume of aid received, the negative coefficient of volatility in the growth regressions explains the insignificantly positive or even negative coefficient found by researchers regressing growth on aid but excluding volatility. We found no significant link between investment and foreign aid, but a positive correlation between aid and (public) consumption and a negative link between aid volatility and public consumption. One explanation is that government consumption includes health care, institution building expenses and education. Moreover, and contrary to popular belief, we find aid to be correlated with less corruption (also after correcting for simultaneity bias), suggesting a second transmission channel through which aid can positively influence growth. Apparently donors’ insistence on improved governance is effective. But aid has also become a source of volatility, and in that way may become inimical to economic growth overall if given in an unstable manner.