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Remittance Inflows and State-Dependent Monetary Policy Transmission in Developing Countries

Author

Listed:
  • Immaculate Machasio

    (Justus-Liebig-University Giessen, Germany)

  • Peter Tillmann

    (Justus-Liebig-University Giessen, Germany)

Abstract

Remittance inflows from overseas workers are an important source of for- eign funding for developing and emerging economies. The literature is in- conclusive about the cyclical nature of remittance inflows. To the extent remittances are procyclical they pose a challenge to monetary policy: a tight- ening of policy will be less effective if at the same time remittances increase strongly. The same is true for a policy easing under exceptionally weak remit- tance inflows. This paper estimates a series of nonlinear (smooth-transition) local projections to study the effectiveness of monetary policy under differ- ent remittance inflows regimes. The model is able to provide state-dependent impulse response functions. We show that for Kenya, Mexico, Colombia and the Philippines monetary policy indeed has a smaller domestic effect under strong inflows of remittances. These results have important implications for the design of inflation targeting in developing countries.

Suggested Citation

  • Immaculate Machasio & Peter Tillmann, 2017. "Remittance Inflows and State-Dependent Monetary Policy Transmission in Developing Countries," GRU Working Paper Series GRU_2017_004, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    • Handle: RePEc:cth:wpaper:gru_2017_004
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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