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Financial development, remittances, and real exchange rate appreciation

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Author Info

  • Pablo A. Acosta
  • Nicole Rae Baerg
  • Federico S. Mandelman

Abstract

For developing countries, remittances are an important and expanding source of capital, equivalent to two-thirds of overall foreign direct investment and nearly 2 percent of gross domestic product. ; This article examines the relationship between remittance inflows, financial sector development, and the real exchange rate. The authors test whether financial sector development can prevent appreciation of the real exchange rate. In particular, they show that well-developed financial sectors can more effectively channel remittances into investment opportunities. ; Using panel data for 109 developing and transition countries for 1990–2003, the authors find that remittances by themselves tend to put upward pressure on the real exchange rate. But this effect is weaker in countries with deeper and more sophisticated financial markets, which seem to retain trade competitiveness.

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Bibliographic Info

Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (2009)
Issue (Month): ()
Pages: 1-12

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Handle: RePEc:fip:fedaer:y:2009:p:1-12:n:v.94no.1

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Related research

Keywords: Emigrant remittances ; Foreign exchange rates;

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Cited by:
  1. Adolfo Barajas & Ralph Chami & Dalia Hakura & Peter Montiel, 2010. "Workers' Remittances and the Equilibrium Real Exchange Rate: Theory and Evidence," Center for Development Economics 2010-02, Department of Economics, Williams College.
  2. Jean-Louis COMBES & Mathilde MAUREL & Christian EBEKE, 2013. "The effect of remittances prior to an election," Working Papers 201307, CERDI.
  3. Mishra, Prachi & Montiel, Peter J & Spilimbergo, Antonio, 2010. "Monetary transmission in low income countries," CEPR Discussion Papers 7951, C.E.P.R. Discussion Papers.
  4. repec:hal:journl:halshs-00587797 is not listed on IDEAS
  5. Jean-Louis Combes & Christian Ebeke, 2011. "Remittances and Household Consumption Instability in Developing Countries," Working Papers halshs-00552245, HAL.

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