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Remittance Infl ows and State-Dependent Monetary Policy Transmission in Developing Countries

Author

Listed:
  • Immaculate Machasio

    (University of Giessen)

  • Peter Tillmann

    (University of Giessen)

Abstract

Remittance infl ows from overseas workers are an important source of foreign funding for developing and emerging economies. The literature is inconclusive about the cyclical nature of remittance infl ows. To the extent remittances are procyclical they pose a challenge to monetary policy: a tightening 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 remittance in flows. This paper estimates a series of nonlinear (smooth-transition) local projections to study the effectiveness of monetary policy under different remittance in flows 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 in flows of remittances. These results have important implications for the design of infl ation targeting in developing countries.

Suggested Citation

  • Immaculate Machasio & Peter Tillmann, 2016. "Remittance Infl ows and State-Dependent Monetary Policy Transmission in Developing Countries," MAGKS Papers on Economics 201638, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    • Handle: RePEc:mar:magkse:201638
    as

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    References listed on IDEAS

    as
    1. Silvana Tenreyro & Gregory Thwaites, 2016. "Pushing on a String: US Monetary Policy Is Less Powerful in Recessions," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 43-74, October.
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    More about this item

    Keywords

    Remittance infl ows; monetary policy; in flation targeting; smooth-transition model; local projections;
    All these keywords.

    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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