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Do Workers' Remittances Reduce the Probability of Current Account Reversals?

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  • Matteo Bugamelli
  • Francesco Paternò

Abstract

The paper combines the literature on financial crises in emerging markets and developing economies with that on international migrations by investigating whether the increasingly large flows of workers' remittances can help reduce the probability of current account reversals. The rationale for this stands in the great stability and low cyclicality of remittances as compared to other private capital flows: these properties, combined with the fact that remittances are cheap inflows of foreign currencies, might reduce the probability that foreign investors suddenly flee out of emerging markets and developing economies and trigger a dramatic current account adjustment. We find that remittances can indeed have such a beneficial effect. In particular, we show that a high level of remittances, as a ratio of GDP, makes the relationship between a decreasing stock of international reserves (over GDP) and a higher probability of current account crises less stringent. The same occurs, though less neatly, for the positive relationship between an increasing stock of external debt (over GDP) and the probability of current account reversals. Our results point also to a threshold effect of remittances: the mechanisms just described are, in fact, much stronger when remittances are above 3 percent of GDP.

Suggested Citation

  • Matteo Bugamelli & Francesco Paternò, 2006. "Do Workers' Remittances Reduce the Probability of Current Account Reversals?," CEP Discussion Papers dp0714, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp0714
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    More about this item

    Keywords

    current account reversals; workers remittances; international reserves; external debt;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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