An empirical analysis of remittance – inflation relationship in Bangladesh: post-floating exchange rate scenario
AbstractWorkers’ remittance inflows have been rising significantly over the past decade for Bangladesh. They have become one of the most stable sources of foreign exchange earnings and emerged as a crucial issue for monetary and fiscal policy. In 2012, remittances contributed to 12.3% of GDP of Bangladesh while the contribution was 6.4% in 2003. Besides lowering poverty and stimulating economic growth through different microeconomic and macroeconomics channels, remittances like other massive capital inflows can induce inflation and appreciate the real exchange rate and thereby hurt the competitiveness of the tradable sector along the lines of the Dutch Disease phenomenon. In this paper, we have empirically tested whether growing remittances cause an inflation (Model 1) as well as food inflation (Model 2) in Bangladesh using monthly data over the time period July 2003- July 2013 (post - floating exchange rate scenario). We have considered two models as the pattern of expenditure varies by consumption categories suggesting that the effect of remittances may also vary across them. Monthly data is used to better represent the changes in inflation as it is well known that inflation changes occur very quickly in response to shocks. The reason for specifically concentrating on the post-floating exchange rate scenario comes from the fact that the impact of remittances on a economy depends on the exchange rate regimes and studies not controlling for regimes may be biased as suggested by Ball, Lopez & Reyes (2013). Johansen (1988) and Johansen & Juselius (1990) cointegration technique is used to determine the long run relationship between remittances and inflation. Then, a Vector Error Correction Model (VECM) approach is applied for estimating the direction, extent and significance of the relationship. The results of both the models show that remittance inflows cause an inflationary pressure in Bangladesh while the responsiveness of food inflation is almost two and half times higher than general inflation.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 55190.
Date of creation: 07 Apr 2014
Date of revision:
Remittances; Inflation; Dutch Disease; Cointegration; VECM; Connectedness Analysis;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- F24 - International Economics - - International Factor Movements and International Business - - - Remittances
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-04-18 (All new papers)
- NEP-INT-2014-04-18 (International Trade)
- NEP-MAC-2014-04-18 (Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Dean Yang, 2006.
"International Migration, Remittances, and Household Investment: Evidence from Philippine Migrants' Exchange Rate Shocks,"
NBER Working Papers
12325, National Bureau of Economic Research, Inc.
- 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.
- Galí, Jordi & Gertler, Mark & López-Salido, J David, 2001.
"European Inflation Dynamics,"
CEPR Discussion Papers
2684, C.E.P.R. Discussion Papers.
- Jordi Gali & Mark Gertler & J. David Lopez-Salido, 2001. "European Inflation Dynamics," NBER Working Papers 8218, National Bureau of Economic Research, Inc.
- Jordi Galí & Mark Gertler & J. David López-Salido, 2000. "European Inflation Dynamics," Banco de Espaï¿½a Working Papers 0020, Banco de Espa�a.
- Emmanuel K.K. Lartey & Federico S. Mandelman & Pablo A. Acosta, 2008.
"Remittances, exchange rate regimes, and the Dutch disease: a panel data analysis,"
2008-12, Federal Reserve Bank of Atlanta.
- Emmanuel K. K. Lartey & Federico S. Mandelman & Pablo A. Acosta, 2012. "Remittances, Exchange Rate Regimes and the Dutch Disease: A Panel Data Analysis," Review of International Economics, Wiley Blackwell, vol. 20(2), pages 377-395, 05.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
- Ari Aisen & Francisco José Veiga, 2007.
"Does Political Instability lead to higher and more volatile inflation? A Panel Data Analysis,"
Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 54(1), pages 5-27, March.
- Ari Aisen & Francisco José Veiga, 2003. "Does Political Instability lead to higher and more volatile inflation? A Panel Data Analysis," NIPE Working Papers 10/2003, NIPE - Universidade do Minho.
- R Blundell & Steven Bond, .
"Initial conditions and moment restrictions in dynamic panel data model,"
W14&104., Economics Group, Nuffield College, University of Oxford.
- Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
- Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
- Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
- Ball, Christopher & Lopez, Claude & Reyes, Javier & Cruz-Zuniga, Martha, 2010.
"Remittances, Inflation and Exchange Rate Regimes in Small Open Economies,"
22648, University Library of Munich, Germany.
- Christopher P. Ball & Claude Lopez & Javier Reyes, 2013. "Remittances, Inflation and Exchange Rate Regimes in Small Open Economies," The World Economy, Wiley Blackwell, vol. 36(4), pages 487-507, 04.
- Christopher P. Ball & Martha Cruz-Zuniga & Claude Lopez & Javier Reyes, 2008. "Remittances, Inflation and Exchange Rate Regimes in Small Open Economies," University of Cincinnati, Economics Working Papers Series 2008-03, University of Cincinnati, Department of Economics.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2004.
"The Modern History of Exchange Rate Arrangements: A Reinterpretation,"
The Quarterly Journal of Economics,
MIT Press, vol. 119(1), pages 1-48, February.
- Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
- German A. Zarate-Hoyos, 2004. "Consumption and Remittances in Migrant Households: Toward a Productive Use of Remittances," Contemporary Economic Policy, Western Economic Association International, vol. 22(4), pages 555-565, October.
- Nicholas Glytsos, 2005. "“Dynamic Effects of Migrant Remittances on Growth: An Econometric Model with an Application to Mediterranean Countries”. Discussion Paper, No. 74, KEPE, Athens, 2002," Labor and Demography 0505014, EconWPA.
- 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.
- Paul De Grauwe & Magdalena Polan, 2005. "Is Inflation Always and Everywhere a Monetary Phenomenon?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(2), pages 239-259, 06.
- Arellano, Manuel & Bover, Olympia, 1995.
"Another look at the instrumental variable estimation of error-components models,"
Journal of Econometrics,
Elsevier, vol. 68(1), pages 29-51, July.
- M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
- Giuliano, Paola & Ruiz-Arranz, Marta, 2006.
"Remittances, Financial Development, and Growth,"
IZA Discussion Papers
2160, Institute for the Study of Labor (IZA).
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
- Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1385-1413, October.
- Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
- David Romer, 1991.
"Openness and Inflation: Theory and Evidence,"
NBER Working Papers
3936, National Bureau of Economic Research, Inc.
- Ball, Christopher P. & Reyes, Javier, 2008. "Inflation targeting or fear of floating in disguise? A broader perspective," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 308-326, March.
- Slobodan Djajic & Sajal Lahiri & Pascalis Raimondos-Moller, 1998. "The Transfer Problem and the Intertemporal Terms of Trade," Canadian Journal of Economics, Canadian Economics Association, vol. 31(2), pages 427-436, May.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.