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Optimal Fiscal and Monetary Policy in the Presence of Remittances

Author

Listed:
  • Michael Gapen

    (Capital Markets Department International Monetary Fund)

  • Thomas Cosimano

    (University of Notre Dame)

  • Ralph Chami

    (IMF Institute)

Abstract

Remittance flows are quickly surpassing private capital flows and official aid in magnitude and rate of growth, making them the single most important form of income flows into developing and emerging economies. This paper uses a stochastic dynamic general equilibrium model to investigate the influence of countercyclical remittances on the conduct of fiscal and monetary policy and trace their effects on real and nominal variables in a business cycle setting. We show that remittances raise disposable income and consumption and insure against income shocks, thereby raising household welfare. However, remittances increase the correlation between labor and output, thereby producing a more volatile business cycle and increasing output and labor market risk. Optimal monetary policy in the presence of remittances deviates from the Friedman rule, highlighting the need for independent government policy instruments.

Suggested Citation

  • Michael Gapen & Thomas Cosimano & Ralph Chami, 2006. "Optimal Fiscal and Monetary Policy in the Presence of Remittances," Computing in Economics and Finance 2006 34, Society for Computational Economics.
    • Handle: RePEc:sce:scecfa:34
    as

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    More about this item

    Keywords

    Remittances; Ramsey Policies; Projection Method;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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