How do transaction costs influence remittances?

Using a new quarterly panel database on remittances, this paper investigates the elasticity of remittances to transaction costs using local projections. The findings suggest that cost reductions have a short-term positive impact on remittances within a quarter, before they stabilize at a higher level. 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 than the direct cost savings from lower transaction costs, thus suggesting an absolute elasticity greater than one. The cost-elasticity exhibits some heterogeneity along several characteristics of the recipient country, notably competition in the remittance market, financial sector deepening, correspondent banking relationships, transparency in remittance costs, financial literacy and ICT development. 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.