People who live in rural areas in low-income countries not only live in poverty, they also have to deal with an extremely variable income. In the absence of a well-functioning credit market, these fluctuations can be costly for households. This study aims to provide knowledge to the cost of these fluctuations, more precisely the study aims to answer how transitory weather shocks in Kenya affect children´s cognitive ability. Where weather shocks are assumed to be aggregated shocks that temporarily change the productivity in districts. The result from the study shows that drought, which can be seen as a negative shock, decrease the cognitive ability of children 11 to 16. The effect is marginally significant at the 10 percent level. No significant effect on cognitive ability is found for children aged 6 to 10. The result for older children is robust to alternative specifications. The study does not show any conclusive evidence on different effects on how boys and girls are affected by droughts.

The first chapter analizes conditional assistance programs. They generate conflicting relationships between international financial institutions (IFIs) and member countries. The experience of IFIs with conditionality in the 1990s led them to allow countries more latitude in the design of their reform programs. A reformist government does not need conditionality and it is useless if it does not want to reform. A government that faces opposition may use conditionality and the help of pro-reform lobbies as a lever to counteract anti-reform groups and succeed in implementing reforms. The second chapter analizes economies saddled with taxes and regulations. I consider an economy in which many taxes, subsidies, and other distortionary restrictions are in place simultaneously. If I start from an inefficient laissez-faire equilibrium because of some domestic distortion, a small trade tax or subsidy can yield a first-order welfare improvement, even if the instrument itself creates distortions of its own. This may result in "welfare paradoxes". The purpose of the chapter is to quantify the welfare effects of changes in tax rates in a small open economy. I conduct the simulation in the context of an intertemporal utility maximization framework. I apply numerical methods to the model developed by Karayalcin. I introduce changes in the tax rates and quantify both the impact on welfare, consumption and foreign assets, and the path to the new steady-state values. The third chapter studies the role of stock markets and adjustment costs in the international transmission of supply shocks. The analysis of the transmission of a positive supply shock that originates in one of the countries shows that on impact the shock leads to an inmediate stock market boom enjoying the technological advance, while the other country suffers from depress stock market prices as demand for its equity declines. A period of adjustment begins culminating in a steady state capital and output level that is identical to the one before the shock. The the capital stock of one country undergoes a non-monotonic adjustment. The model is tested with plausible values of the variables and the numeric results confirm the predictions of the theory.