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Workers' Remittances and the Equilibrium Real Exchange Rate: Theory and Evidence

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Author Info

  • Ralph Chami
  • Adolfo Barajas
  • Peter Montiel
  • Dalia Hakura

Abstract

This paper investigates the impact of workers' remittances on equilibrium real exchange rates (ERER) in recipient economies. Using a small open economy model, it shows that standard 'Dutch Disease' results of appreciation are substantially weakened or even overturned depending on: degree of openness; factor mobility between domestic sectors; counter cyclicality of remittances; the share of consumption in tradables; and the sensitivity of a country's risk premium to remittance flows. Panel cointegration techniques on a large set of countries provide support for these analytical results, and show that ERER appreciation in response to sustained remittance flows tends to be quantitatively small.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/287.

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Length: 67
Date of creation: 01 Dec 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/287

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Related research

Keywords: Capital inflows; Developing countries; Economic models; Exchange rate appreciation; Low-income developing countries; Real effective exchange rates; Workers remittances;

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References

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  1. Emmanuel K.K. Lartey & Federico S. Mandelman & Pablo A. Acosta, 2008. "Remittances, exchange rate regimes, and the Dutch disease: a panel data analysis," Working Paper 2008-12, Federal Reserve Bank of Atlanta.
  2. Amuedo-Dorantes, Catalina & Pozo, Susan, 2004. "Workers' Remittances and the Real Exchange Rate: A Paradox of Gifts," World Development, Elsevier, vol. 32(8), pages 1407-1417, August.
  3. Lone Engbo Christiansen & Alessandro Prati & Luca Antonio Ricci & Thierry Tressel, 2009. "External Balance in Low Income Countries," IMF Working Papers 09/221, International Monetary Fund.
  4. 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.
  5. Pablo A. Acosta & Nicole Rae Baerg & Federico S. Mandelman, 2009. "Financial development, remittances, and real exchange rate appreciation," Economic Review, Federal Reserve Bank of Atlanta, pages 1-12.
  6. Yves Bourdet & Hans Falck, 2006. "Emigrants' remittances and Dutch Disease in Cape Verde," International Economic Journal, Korean International Economic Association, vol. 20(3), pages 267-284.
  7. Faini, Riccardo, 1994. "Workers Remittances and the Real Exchange Rate: A Quantitative Framework," Journal of Population Economics, Springer, vol. 7(2), pages 235-45.
  8. Joannes Mongardini & Brett Rayner, 2009. "Grants, Remittances, and the Equilibrium Real Exchange Rate in Sub-Saharan African Countries," IMF Working Papers 09/75, International Monetary Fund.
  9. Mario Holzner, 2006. "Real Exchange Rate Distortion in Southeast Europe," The wiiw Balkan Observatory Working Papers 068, The Vienna Institute for International Economic Studies, wiiw.
  10. Lopez, Humberto & Molina, Luis & Bussolo, Maurizio, 2007. "Remittances and the real exchange rate," Policy Research Working Paper Series 4213, The World Bank.
  11. Martin Petri & Tahsin Saadi-Sedik, 2006. "To Smooth or Not to Smooth - The Impact of Grants and Remittances on the Equilibrium Real Exchange Rate in Jordan," IMF Working Papers 06/257, International Monetary Fund.
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Cited by:
  1. Farid MAKHLOUF & Mazhar MUGHAL, 2011. "Remittances, Dutch Disease, and Competitiveness - A Bayesian Analysis," Working Papers 2011-2012_1, CATT - UPPA - Université de Pau et des Pays de l'Adour, revised Dec 2011.

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