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Emerging market business cycles with remittance fluctuations

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Author Info

  • Ceyhun Bora Durdu
  • Serdar Sayan

Abstract

This paper analyzes the implications of remittance fluctuations for various macroeconomic variables and Sudden Stops. The paper employs a quantitative two-sector model of a small open economy with financial frictions calibrated to Mexican and Turkish economies, two major recipients, whose remittance receipts feature opposite cyclical characteristics. We find that remittances dampen the business cycles in Mexico, whereas they amplify the cycles in Turkey. Their quantitative effects in the long run, approximated by the stochastic steady state are mild. In the short run, however, remittances have quantitatively large impacts on the economy, when the economy is borrowing constrained. This is because agents in the economy cannot adjust their precautionary wealth to sudden tightening in credit, hence, fluctuations in remittances get magnified through an endogenous debt-deflation mechanism. Our findings suggest that procyclical (or countercyclical) remittances can play a significant deepening (or mitigating) role for Sudden Stops.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 946.

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Date of creation: 2008
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Handle: RePEc:fip:fedgif:946

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Keywords: Business cycles;

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References

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  1. Ricardo J. Caballero & Stavros Panageas, 2003. "Hedging Sudden Stops and Precautionary Contractions," NBER Working Papers 9778, National Bureau of Economic Research, Inc.
  2. Funkhouser, Edward, 1992. "Migration from Nicaragua: some recent evidence," World Development, Elsevier, vol. 20(8), pages 1209-1218, August.
  3. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
  4. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
  5. Acosta, Pablo A. & Lartey, Emmanuel K.K. & Mandelman, Federico S., 2009. "Remittances and the Dutch disease," Journal of International Economics, Elsevier, vol. 79(1), pages 102-116, September.
  6. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
  7. Ceyhun Bora Durdu & Enrique G. Mendoza & Marco E. Terrones, 2007. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism," NBER Working Papers 13123, National Bureau of Economic Research, Inc.
  8. Guillermo Calvo & Alejandro Izquierdo & Luis-Fernando Mejía, 2004. "On the empirics of Sudden Stops: the relevance of balance-sheet effects," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  9. Erik Lueth & Marta Ruiz-Arranz, 2007. "Are workers' remittances a hedge against macroeconomic shocks? The case of Sri Lanka," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 14(1), pages 25-39, June.
  10. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," Trinity Economics Papers 20014, Trinity College Dublin, Department of Economics.
  11. Reinhart, Carmen & Ostry, Jonathan, 1991. "Private Saving and Terms of Trade Shocks," MPRA Paper 13716, University Library of Munich, Germany.
  12. Dean Yang, 2008. "International Migration, Remittances and Household Investment: Evidence from Philippine Migrants' Exchange Rate Shocks," Economic Journal, Royal Economic Society, vol. 118(528), pages 591-630, 04.
  13. 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.
  14. Pablo Andres Neumeyer & Fabrizio Perri, 1999. "Business Cycles in Emerging Economies: the role of interest rates," Department of Economics Working Papers 014, Universidad Torcuato Di Tella.
  15. Durdu, Ceyhun Bora, 2009. "Quantitative implications of indexed bonds in small open economies," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 883-902, April.
  16. Marta Ruiz-Arranz & Erik Lueth, 2007. "Are Workers' Remittances a Hedge Against Macroeconomic Shocks? The Case of Sri Lanka," IMF Working Papers 07/22, International Monetary Fund.
  17. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
  18. Michael T. Gapen & Thomas F. Cosimano & Ralph Chami, 2006. "Beware of Emigrants Bearing Gifts: Optimal Fiscal and Monetary Policy in the Presence of Remittances," IMF Working Papers 06/61, International Monetary Fund.
  19. 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.
  20. Sayan, Serdar & Tekin-Koru, Ayca, 2007. "Remittances, Business Cycles and Poverty: The Recent Turkish Experience," MPRA Paper 6029, University Library of Munich, Germany.
  21. Enrique G. Mendoza, 2006. "Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies," IMF Working Papers 06/88, International Monetary Fund.
  22. Kose, M. Ayhan, 2002. "Explaining business cycles in small open economies: 'How much do world prices matter?'," Journal of International Economics, Elsevier, vol. 56(2), pages 299-327, March.
  23. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
  24. Kuckulenz, Anja & Buch, Claudia M., 2004. "Worker Remittances and Capital Flows to Developing Countries," ZEW Discussion Papers 04-31, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  25. Serdar Sayan, 2006. "Business Cycles and Workers' Remittances: How Do Migrant Workers Respond to Cyclical Movements of GDP at Home?," IMF Working Papers 06/52, International Monetary Fund.
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Citations

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Cited by:
  1. Katarzyna Budnik, 2011. "Temporary migration in theories of international mobility of labour," Bank i Kredyt, National Bank of Poland, Economic Institute, vol. 42(6), pages 7-48.
  2. Pablo A. Acosta & Emmanuel K.K. Lartey & Federico S. Mandelman, 2007. "Remittances and the Dutch disease," Working Paper 2007-08, Federal Reserve Bank of Atlanta.
  3. Federico S. Mandelman & Andrei Zlate, 2010. "Immigration, remittances, and business cycles," Working Paper 2008-25, Federal Reserve Bank of Atlanta.
  4. Timo Baas & Silvia Maja Melzer, 2012. "The Macroeconomic Impact of Remittances: A sending country perspective," Norface Discussion Paper Series 2012021, Norface Research Programme on Migration, Department of Economics, University College London.
  5. Hulya Ulku, 2010. "Remitting Behaviour of Turkish Migrants: Evidence from Household Data in Germany," Brooks World Poverty Institute Working Paper Series 11510, BWPI, The University of Manchester.

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