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A Small Open Economy DSGE Model with Workers’ Remittances

Author

Listed:
  • Muhammad Rehman

    (State Bank of Pakistan)

  • Sajawal Khan

    (State Bank of Pakistan)

  • Zafar Hayat

    (State Bank of Pakistan)

Abstract

In this paper, we develop and estimate a small open economy Dynamic Stochastic General Equilibrium (DSGE) model with an enriched specification, which enables us to include a variable of high significance for Pakistan viz. workers’ remittances. The results indicate that a positive shock to workers’ remittances help boost real growth via increased consumption and imported investment and helps ease-off the pressure on current account balance and thereby exchange rate. Too much dependence on workers’ remittances to help meet the trade deficits may potentially leave the economy in doldrums in case sizable negative shocks occur to the flow of foreign remittances. Therefore there is a need for structural reforms to help the economy out of the historical trade deficits, and decrease dependence on the workers’ remittances source to allow for a sustainable economic growth.

Suggested Citation

  • Muhammad Rehman & Sajawal Khan & Zafar Hayat, 2017. "A Small Open Economy DSGE Model with Workers’ Remittances," SBP Working Paper Series 84, State Bank of Pakistan, Research Department.
    • Handle: RePEc:sbp:wpaper:84
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    File URL: http://www.sbp.org.pk/publications/wpapers/2017/wp84.pdf
    File Function: First version, 2017
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    More about this item

    Keywords

    Business cycles; Workers remittances; Open economy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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