The Macroeconomics of Remittances In the Philippines

The literature on remittances has in the past concentrated on the microeconomic aspects of the remittance process: the determinants of remittances, impact of remittances on household allocation decisions, and their impact on poverty. Only recently has there been more attention on the macroeconomic impact of remittances. It is to be expected that, when remittance inflows are as large as they are in the Philippines, they are likely to have significant macroeconomic effects. Our paper first explores the cyclical dynamics of remittances to the Philippines and secondly, analyses the macroeconomic impact of remittances and the monetary policy implications. In this second endeavour, our paper uses a dynamic structural quarterly macroeconometric model of the Philippines to trace the various channels along which remittances affect the main macroeconomic variables. In the assessment of the impact of the recent global recession we should also consider the remittances as a transmission channel. We have established that remittances are driven by the economic cycle of the main host countries and that the ongoing recession will thus lead to a decline in transfers. Through our model we have been able to trace the impact of changes in remittances on important economic variables, like aggregate demand, money supply and interest rates, exchange rate and labour supply and wages. We have also established that the fluctuations in remittances flows over the years are of a magnitude that is significant enough for policy makers to take notice. The model simulations have shown that the impact of the US recession on the Philippine economy is more severe once we take account of the endogeneity and pro-cyclicality of remittances.