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Remittances, Exchange Rates, and the Role of Financial Development

Author

Listed:
  • John Beirne

    (Asian Development Bank)

  • Pradeep Panthi

    (Policy Research Institute)

  • Guna Raj Bhatta

    (Nepal Rastra Bank)

Abstract

This paper examines the role of financial development as a buffer for the appreciating effects of remittances on exchange rates using annual data from 1996 to 2021 for 146 economies, with a focus on 43 high remittance-receiving economies. A panel regression framework is employed in the baseline analysis, which remains robust to an instrumental variables approach. The findings reveal that remittances have appreciating effects on real effective exchange rates (REER), especially in high remittance-receiving economies, consistent with the “Dutch disease” mechanism. Examining subcomponents of financial development, we find that stronger domestic financial markets and market-based financial deepening are critical channels for absorbing the REER appreciation effects of remittances

Suggested Citation

  • John Beirne & Pradeep Panthi & Guna Raj Bhatta, 2025. "Remittances, Exchange Rates, and the Role of Financial Development," ADB Economics Working Paper Series 824, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:021791
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    Keywords

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    JEL classification:

    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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