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

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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, and countercyclicality of remittances; the share of consumption in tradables; and the sensitivity of a country’s risk premium to remittance flows. Panel integration 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 Department of Economics, Williams College in its series Department of Economics Working Papers with number 2010-14.

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Length: 57 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:wil:wileco:2010-14

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Keywords: Remittances; Real Exchange Rate; Dutch Disease;

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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. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. Faini, Riccardo, 1994. "Workers Remittances and the Real Exchange Rate: A Quantitative Framework," Journal of Population Economics, Springer, vol. 7(2), pages 235-45.
  9. 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.
  10. 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.
  11. Lopez, Humberto & Molina, Luis & Bussolo, Maurizio, 2007. "Remittances and the real exchange rate," Policy Research Working Paper Series 4213, The World Bank.
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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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