IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2022-218.html
   My bibliography  Save this paper

How Do Transaction Costs Influence Remittances

Author

Listed:
  • Mr. Kangni R Kpodar
  • Patrick A. Imam

Abstract

Using a new quarterly panel database on remittances (71 countries over the period 2011Q1- 2020Q4), this paper investigates the elasticity of remittances to transaction costs in a high frequency and dynamic setting. It adds to the literature by systematically exploring the heterogeneity in the cost-elasticity of remittances along several country characteristics. The findings suggest that cost reductions have a short-term positive impact on remittances, that dissipates beyond one quarter. According to our estimates, reducing transaction costs to the Sustainable Development Goal target of 3 percent could generate an additional US$32bn in remittances, higher that the direct cost savings from lower transaction costs, thus suggesting an absolute elasticity greater than one. Among remittance cost-mitigation factors, higher competition in the remittance market, a deeper financial sector, and adequate correspondent banking relationships are associated with a lower elasticity of remittance to transaction costs. Similarly, remittance cost-adaptation factors such as enhanced transparency in remittance costs, improved financial literary and higher ICT development coincide with remittances being less sensitive to transaction costs. Supplementing the panel analysis, the use of micro data from the USA-Mexico corridor confirm that migrants facing higher transaction costs tend to remit less, and that this effect is less pronounced for skilled migrants and those that have access to a bank account.

Suggested Citation

  • Mr. Kangni R Kpodar & Patrick A. Imam, 2022. "How Do Transaction Costs Influence Remittances," IMF Working Papers 2022/218, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2022/218
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=525067
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Alcaraz, Carlo & Chiquiar, Daniel & Salcedo, Alejandrina, 2012. "Remittances, schooling, and child labor in Mexico," Journal of Development Economics, Elsevier, vol. 97(1), pages 156-165.
    2. Riccardo Faini, 2007. "Remittances and the Brain Drain: Do More Skilled Migrants Remit More?," The World Bank Economic Review, World Bank, vol. 21(2), pages 177-191, May.
    3. van Rooij, Maarten & Lusardi, Annamaria & Alessie, Rob, 2011. "Financial literacy and stock market participation," Journal of Financial Economics, Elsevier, vol. 101(2), pages 449-472, August.
    4. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    5. 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.
    6. Tito Nícias Teixeira da Silva Filho, 2021. "No Easy Solution: A Smorgasbord of Factors Drive Remittance Costs," IMF Working Papers 2021/199, International Monetary Fund.
    7. Junaid Ahmed & Mazhar Mughal & Inmaculada Martínez‐Zarzoso, 2021. "Sending money home: Transaction cost and remittances to developing countries," The World Economy, Wiley Blackwell, vol. 44(8), pages 2433-2459, August.
    8. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
    9. Kosse, Anneke & Vermeulen, Robert, 2014. "Migrants’ Choice of Remittance Channel: Do General Payment Habits Play a Role?," World Development, Elsevier, vol. 62(C), pages 213-227.
    10. Vera Chiodi & Esteban Jaimovich & Gabriel Montes-Rojas, 2012. "Migration, Remittances and Capital Accumulation: Evidence from Rural Mexico," Journal of Development Studies, Taylor & Francis Journals, vol. 48(8), pages 1139-1155, February.
    11. World Bank Group, 2017. "Global Financial Inclusion and Consumer Protection Survey, 2017 Report," World Bank Publications - Reports 28998, The World Bank Group.
    12. Coen N. Teulings & Nikolay Zubanov, 2014. "Is Economic Recovery A Myth? Robust Estimation Of Impulse Responses," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(3), pages 497-514, April.
    13. Cox-Edwards, Alejandra & Rodríguez-Oreggia, Eduardo, 2009. "Remittances and Labor Force Participation in Mexico: An Analysis Using Propensity Score Matching," World Development, Elsevier, vol. 37(5), pages 1004-1014, May.
    14. Demirgüç-Kunt, Asli & Córdova, Ernesto López & Pería, María Soledad Martínez & Woodruff, Christopher, 2011. "Remittances and banking sector breadth and depth: Evidence from Mexico," Journal of Development Economics, Elsevier, vol. 95(2), pages 229-241, July.
    15. Furceri, Davide & Loungani, Prakash & Zdzienicka, Aleksandra, 2018. "The effects of monetary policy shocks on inequality," Journal of International Money and Finance, Elsevier, vol. 85(C), pages 168-186.
    16. Mihasonirina Andrianaivo & Kangni Kpodar, 2012. "Mobile Phones, Financial Inclusion, and Growth," Review of Economics and Institutions, Università di Perugia, vol. 3(2).
    17. Mikkel Plagborg‐Møller & Christian K. Wolf, 2021. "Local Projections and VARs Estimate the Same Impulse Responses," Econometrica, Econometric Society, vol. 89(2), pages 955-980, March.
    18. Mora-Rivera, Jorge & van Gameren, Edwin, 2021. "The impact of remittances on food insecurity: Evidence from Mexico," World Development, Elsevier, vol. 140(C).
    19. Joseph E. Stiglitz, 2017. "The Revolution of Information Economics: The Past and the Future," NBER Working Papers 23780, National Bureau of Economic Research, Inc.
    20. John Gibson & David McKenzie & Halahingano Rohorua, 2006. "How Cost Elastic are Remittances? Estimates from Tongan Migrants in New Zealand," Working Papers in Economics 06/02, University of Waikato.
    21. Kakhkharov, Jakhongir & Akimov, Alexandr & Rohde, Nicholas, 2017. "Transaction costs and recorded remittances in the post-Soviet economies: Evidence from a new dataset on bilateral flows," Economic Modelling, Elsevier, vol. 60(C), pages 98-107.
    22. HwaJung Choi, 2007. "Are Remittances Insurance? Evidence from Rainfall Shocks in the Philippines," The World Bank Economic Review, World Bank, vol. 21(2), pages 219-248, May.
    23. Fabrizio Ferriani & Giacomo Oddo, 2019. "More distance, more remittance? Remitting behavior, travel cost, and the size of the informal channel," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 48(3), November.
    24. Catalina Amuedo-Dorantes, 2014. "The good and the bad in remittance flows," IZA World of Labor, Institute of Labor Economics (IZA), pages 1-97, November.
    25. Catalina Amuedo-Dorantes & Susan Pozo, 2006. "Remittances as insurance: evidence from Mexican immigrants," Journal of Population Economics, Springer;European Society for Population Economics, vol. 19(2), pages 227-254, June.
    26. repec:iza:izawol:journl:y:2014:p:97 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Michael A. Clemens & Timothy N. Ogden, 2020. "Migration and household finances: How a different framing can improve thinking about migration," Development Policy Review, Overseas Development Institute, vol. 38(1), pages 3-27, January.
    2. Michael Clemens and Timothy N. Ogden, 2014. "Migration as a Strategy for Household Finance: A Research Agenda on Remittances, Payments, and Development- Working Paper 354," Working Papers 354, Center for Global Development.
    3. Alessio Ciarlone, 2023. "Remittances in times of crisis: evidence from Italian corridors," Temi di discussione (Economic working papers) 1402, Bank of Italy, Economic Research and International Relations Area.
    4. Randazzo, Teresa & Pavanello, Filippo & De Cian, Enrica, 2023. "Adaptation to climate change: Air-conditioning and the role of remittances," Journal of Environmental Economics and Management, Elsevier, vol. 120(C).
    5. Bettin, Giulia & Lucchetti, Riccardo & Zazzaro, Alberto, 2012. "Endogeneity and sample selection in a model for remittances," Journal of Development Economics, Elsevier, vol. 99(2), pages 370-384.
    6. Leonardo Bonilla-Mejía, 2017. "Choques externos y remesas internacionales en las regiones de Colombia," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 35(84), pages 189-202, December.
    7. Gloria Clarissa O. Dzeha, 2016. "The decipher, theory or empirics: a review of remittance studies," African Journal of Accounting, Auditing and Finance, Inderscience Enterprises Ltd, vol. 5(2), pages 113-134.
    8. Joseph B. Ajefu & Joseph O. Ogebe, 2021. "The effects of international remittances on expenditure patterns of the left‐behind households in Sub‐Saharan Africa," Review of Development Economics, Wiley Blackwell, vol. 25(1), pages 405-429, February.
    9. Ambrosius, Christian, 2012. "Are remittances a "catalyst" for financial access? Evidence from Mexican household data," Discussion Papers 2012/8, Free University Berlin, School of Business & Economics.
    10. Bharati Basu & James T. Bang, 2013. "Insurance and remittances: New evidence from Latin American immigrants to the US," Migration Letters, Migration Letters, vol. 10(3), pages 383-398, September.
    11. Ibrahim Sirkeci & Jeffrey H. Cohen & Dilip Ratha, 2012. "Migration and Remittances during the Global Financial Crisis and Beyond," World Bank Publications - Books, The World Bank Group, number 13092, December.
    12. Ambrosius, Christian, 2011. "Are Remittances a 'Catalyst' for Financial Access? Evidence from Mexico," Proceedings of the German Development Economics Conference, Berlin 2011 5, Verein für Socialpolitik, Research Committee Development Economics.
    13. Bahadir, Berrak & Chatterjee, Santanu & Lebesmuehlbacher, Thomas, 2018. "The macroeconomic consequences of remittances," Journal of International Economics, Elsevier, vol. 111(C), pages 214-232.
    14. Junaid Ahmed & Mazhar Mughal & Inmaculada Martínez‐Zarzoso, 2021. "Sending money home: Transaction cost and remittances to developing countries," The World Economy, Wiley Blackwell, vol. 44(8), pages 2433-2459, August.
    15. Gnangnon, Sèna Kimm, 2023. "Duration of membership in the world trade organization and investment-oriented remittances inflows," The Quarterly Review of Economics and Finance, Elsevier, vol. 88(C), pages 258-277.
    16. Balli, Faruk & Guven, Cahit & Balli, Hatice O. & Gounder, Rukmani, 2010. "The Role of Institutions, Culture, and Wellbeing in Explaining Bilateral Remittance Flows: Evidence Both Cross-Country and Individual-Level Analysis," MPRA Paper 29609, University Library of Munich, Germany.
    17. Ahmad Hassan Ahmad & Christopher Green & Fei Jiang, 2020. "Mobile Money, Financial Inclusion And Development: A Review With Reference To African Experience," Journal of Economic Surveys, Wiley Blackwell, vol. 34(4), pages 753-792, September.
    18. Jean-Louis Combes & Christian Hubert Ebeke & Mathilde Maurel & Urbain Thierry Yogo, 2011. "Remittances and the prevalence of working poor," Post-Print halshs-00587797, HAL.
    19. Imene Guetat & Dorsaf Sridi, 2017. "Institutional quality effect on remittances in MENA region," Middle East Development Journal, Taylor & Francis Journals, vol. 9(1), pages 84-100, January.
    20. Md Shahadath Hossain & Adesola Sunmoni, "undated". "Do Remittances Influence Household Investment Decisions? Evidence from Sub-Saharan Africa," Economics Discussion Papers em-dp2021-04, Department of Economics, University of Reading.

    More about this item

    Keywords

    Remittances; Transaction Costs; Elasticity; Migration; elasticity of remittance; remittance market; remittances flow; remittance cost; cost-mitigation factor; Income; Exchange rates; Correspondent banking; Global;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2022/218. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.