Remittances and Real Exchange rate in developing countries

Emigrants remittances are important sources of income for many developing countries. This paper examines the effects of remittances in developing countries through a two-sector (tradable good and nontradable good) dynamic stochastic general equilibrium model, in which capital can be no homogeneous across sector. The paper shows that remittances lead to an appreciation in the steady-state real exchange rate only if capital is less homogeneous across. If there capital is homogeneous, remittances have no effect on the steady-state real exchange rate. About the dynamics, positive shocks to exogenous altruistic remittances lead to an appreciation in real exchange rate, an increase in consumption and a fall in labor supply. Countercyclical altruistic remittances attenuate the decrease in consumption following negative shocks to global productivity. Positive shocks to self-interested remittances also cause an appreciation in real exchange rate appreciation, an increase in consumption and a fall in la The remittances shocks affect the welfare and the effects on the welfare depend on cyclical pattern of remittances. If capital is less homogeneous across sector, the shocks effects on consumption are more persistent. If capital is homogeneous, the initial appreciation of the real exchange rate is greater but the appreciation occurs only at the firt period. On the contrary, if capital is less homogeneous, the initial appreciation of the real exchange rate is smaller but the appreciation takes long time.