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Emerging Market Business Cycles with Remittance Fluctuations

  • Ceyhun Bora Durdu
  • Serdar Sayan

This paper analyzes the implications of remittance fluctuations for various macroeconomic variables and sudden stops. The paper employs a quantitative two-sector model of a small open economy with financial frictions calibrated to Mexican and Turkish economies, two major recipients, whose remittance receipts feature opposite cyclical characteristics. We find that remittances dampen business cycles in Mexico, whereas they amplify the cycles in Turkey. Their quantitative effects in the long run, approximated by the stochastic steady state, are mild. In the short run, however, remittances have quantitatively large impacts on the economy, when the economy is borrowing-constrained. This is because agents in the economy cannot adjust their precautionary wealth to sudden tightening in credit, and hence, fluctuations in remittances get magnified through an endogenous debt-deflation mechanism. The findings suggest that procyclical (or countercyclical) remittances can play a significant deepening (or mitigating) role for sudden stops.

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Article provided by Palgrave Macmillan in its journal IMF Staff Papers.

Volume (Year): 57 (2010)
Issue (Month): 2 (June)
Pages: 303-325

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Handle: RePEc:pal:imfstp:v:57:y:2010:i:2:p:303-325
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  1. Pablo A. Neumeyer & Fabrizio Perri, 2001. "Business Cycles in Emerging Economies:The Role of Interest Rates," Working Papers 01-12, New York University, Leonard N. Stern School of Business, Department of Economics.
  2. Kose, M. Ayhan, 2002. "Explaining business cycles in small open economies: 'How much do world prices matter?'," Journal of International Economics, Elsevier, vol. 56(2), pages 299-327, March.
  3. Enrique G. Mendoza & Ceyhun Bora Durdu & Marco Terrones, 2007. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism," IMF Working Papers 07/146, International Monetary Fund.
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  6. Durdu, Ceyhun Bora, 2009. "Quantitative implications of indexed bonds in small open economies," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 883-902, April.
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  8. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
  9. Michael T. Gapen & Thomas F. Cosimano & Ralph Chami, 2006. "Beware of Emigrants Bearing Gifts: Optimal Fiscal and Monetary Policy in the Presence of Remittances," IMF Working Papers 06/61, International Monetary Fund.
  10. Ralph Chami & Connel Fullenkamp & Samir Jahjah, 2005. "Are Immigrant Remittance Flows a Source of Capital for Development?," IMF Staff Papers, Palgrave Macmillan, vol. 52(1), pages 55-81, April.
  11. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," Trinity Economics Papers 20014, Trinity College Dublin, Department of Economics.
  12. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004. "When it rains, it pours: Procyclical capital flows and macroeconomic policies," MPRA Paper 13883, University Library of Munich, Germany.
  13. Erik Lueth & Marta Ruiz-Arranz, 2007. "Are workers' remittances a hedge against macroeconomic shocks? The case of Sri Lanka," Asia-Pacific Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 14(1), pages 25-39, June.
  14. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," IDB Publications (Working Papers) 6516, Inter-American Development Bank.
  15. Enrique G. Mendoza, 2006. "Real Exchange Rate Volatility and the Price of Nontradables in Sudden-Stop-Prone Economies," IMF Working Papers 06/88, International Monetary Fund.
  16. Caballero, Ricardo J. & Panageas, Stavros, 2008. "Hedging sudden stops and precautionary contractions," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 28-57, February.
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  18. repec:oup:qjecon:v:109:y:1994:i:3:p:659-84 is not listed on IDEAS
  19. Serdar Sayan, 2006. "Business Cycles and Workers' Remittances: How Do Migrant Workers Respond to Cyclical Movements of GDP At Home?," IMF Working Papers 06/52, International Monetary Fund.
  20. 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.
  21. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
  22. Funkhouser, Edward, 1992. "Migration from Nicaragua: some recent evidence," World Development, Elsevier, vol. 20(8), pages 1209-1218, August.
  23. Claudia M. Buch & Anja Kuckulenz & Marie-Helene Le Manchec, 2002. "Worker Remittances and Capital Flows," Kiel Working Papers 1130, Kiel Institute for the World Economy.
  24. Enrique G. Mendoza, 2002. "Credit, Prices, and Crashes: Business Cycles with a Sudden Stop," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 335-392 National Bureau of Economic Research, Inc.
  25. Kim, Sunghyun Henry & Kose, M. Ayhan, 2003. "Dynamics Of Open-Economy Business-Cycle Models: Role Of The Discount Factor," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 263-290, April.
  26. Sayan, Serdar & Tekin-Koru, Ayca, 2007. "Remittances, Business Cycles and Poverty: The Recent Turkish Experience," MPRA Paper 6029, University Library of Munich, Germany.
  27. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
  28. Kuckulenz, Anja & Buch, Claudia M., 2004. "Worker Remittances and Capital Flows to Developing Countries," ZEW Discussion Papers 04-31, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
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