Remittances and the Dutch disease phenomenon: evidence from the bounds error correction modelling and a panel space

Remittances have grown in size and importance. They are also among the most stable inflows of scarce foreign exchange for the developing world. While such inflows can boost economic growth, they can also appreciate domestic currency and thus, hurt exports – an unintended side effect commonly referred to as ‘the Dutch-disease phenomenon (DDP).’ This paper adds to this growing literature by applying the bounds-testing approach to co-integration/error correction, as well as the panel modelling. The DDP has been explored using a reduced form model linking remittance inflows to the real exchange rate of major remittance destinations in the world during the past three decades. While the bounds-testing approach using country-specific data, point at the paucity of the DDP generally, in the utilized panel co-integrated space, its short-run presence is mixed, though its long-run evidence is quite apparent. Indeed, using the preferred random effect model, the findings tend to suggest that a 10% increase in the remittance/GDP ratio, significantly appreciates the real exchange rate by about 0.009 units. Such a finding is also in line with the long-run results of the bounds-testing algorithm.