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Banks, remittances and financial deepening in receiving countries. A model

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  • Enrique Alberola

    ()
    (Banco de España)

  • Rodrigo César Salvado

    ()
    (Banco Centroamericano de Integración Económica)

Abstract

A remarkable fact of the mushrooming remittances market is the absence of commercial banks as relevant players. Furthermore, remittances have been identified as a potential catalyst for the financial deepening of receiving countries through higher access to banking services by migrants' families. Building upon these features, this paper sets up a two-period financial model of remittances without uncertainty. The formulation acknowledges, on the one hand, the altruism component of remittances sent by migrants to their families and, on the other hand, the dominant position of Money Transfer Operators (MTO's) due to migrants' mistrust to banks, which hinders the access of banks to the market. Altruism compounded with a non-competitive market allows MTO's to set excessively high remittance fees and to attain monopolistic rents. The model shows that banks can challenge this position thanks to their role as providers of remunerated saving and credit, which enables them to overcome the competitive disadvantage derived by migrants' mistrust. Notwithstanding this, the main positive impact of banks' entry is attained through higher competition, not through the provision of financial services. All in all, the entry of banks reduces the fees and increases the level of remittances, allows an optimal consumption smoothing and improves the welfare of migrants and their families, although it also increases the volatility of remittances.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/06/Fic/dt0621e.pdf
File Function: First version, August 2006
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0621.

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Length: 48 pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:bde:wpaper:0621

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Keywords: banks; financial development; migrations; remittances;

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References

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  1. Claudia M. Buch & Anja Kuckulenz & Marie-Helene Le Manchec, 2002. "Worker Remittances and Capital Flows," Kiel Working Papers 1130, Kiel Institute for the World Economy.
  2. Ralph Chami & Connel Fullenkamp & Samir Jahjah, 2005. "Are Immigrant Remittance Flows a Source of Capital for Development?," IMF Staff Papers, Palgrave Macmillan, vol. 52(1), pages 55-81, April.
  3. Andrea Repetto, 2001. "Incentivos al Ahorro Personal: Lecciones de la Economía del Comportamiento," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 103, Centro de Economía Aplicada, Universidad de Chile.
  4. Nordblom, Katarina, 1997. "Precautionary Saving and Altruism," Working Paper Series, Uppsala University, Department of Economics 1997:19, Uppsala University, Department of Economics.
  5. Shleifer, Andrei & Summers, Lawrence H. & Bernheim, B. Douglas, 1986. "The Strategic Bequest Motive," Scholarly Articles 3721794, Harvard University Department of Economics.
  6. Richard H. Adams, Jr. & John Page, 2003. "International migration, remittances, and poverty in developing countries," Policy Research Working Paper Series 3179, The World Bank.
  7. Rapoport, Hillel & Docquier, Frédéric, 2005. "The Economics of Migrants’ Remittances," IZA Discussion Papers 1531, Institute for the Study of Labor (IZA).
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Cited by:
  1. Luis J. Álvarez & Ignacio Hernando, 2006. "Competition and price adjustment in the euro area," Banco de Espa�a Working Papers, Banco de Espa�a 0629, Banco de Espa�a.
  2. Vermeulen, Philip & Dias, Daniel & Dossche, Maarten & Gautier, Erwan & Hernando, Ignacio & Sabbatini, Roberto & Stahl, Harald, 2007. "Price setting in the euro area: some stylised facts from individual producer price data," Working Paper Series, European Central Bank 0727, European Central Bank.
  3. Kujal Praveen & Ruiz Juan M., 2007. "Cost Effectiveness of R&D and Strategic Trade Policy," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 7(1), pages 1-35, April.
  4. Ricardo Gimeno & Juan M. Nave, 2006. "Genetic algorithm estimation of interest rate term structure," Banco de Espa�a Working Papers, Banco de Espa�a 0634, Banco de Espa�a.
  5. Ritha Sukadi Mata, 2009. "Microfinance Institutions (MFIs) on the Remittances Market: Money Transfer Activity and Savings Mobilisation," Working Papers CEB, ULB -- Universite Libre de Bruxelles 09-022.RS, ULB -- Universite Libre de Bruxelles.
  6. Bjuggren, Per-Olof & Dzansi, James & Shukur, Ghazi, 2010. "Remittances and Investment," Working Paper Series in Economics and Institutions of Innovation, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies 216, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.

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