The Impact of Remittances on Monetary Transmission Mechanism in Remittance-recipient Countries: with Focus on Credit and Exchange Rate Channels

Remittances contribute to welfare enhancement and poverty alleviation in many remittance-recipient economies. However, recent literature also focuses on the macroeconomic impact of remittances due to their increasing inflow into these economies. We use an unbalanced heterogeneous panel Structural Vector Autoregression (SVAR) methodology to study the impact of remittances on intermediate monetary transmission channels in remittance-recipient countries. In particular, we analyse the effect of remittances on credit and exchange rate channels in these economies. We, initially, estimate credit and exchange rate impulse responses (IRs) to a shock in remittances. The IRs estimates suggest a significant variation among countries in credit and exchange rates in response to a shock in remittances. In the next stage, we run a cross-section regression of these responses to identify the factors influencing the IRs of these variables. We find that the magnitude of remittances received by an economy significantly impacts the exchange rate channel thus affecting the smooth functioning of the monetary transmission mechanism. However, the effect of remittances on the credit channel is dependent on the level of remittance inflows and savings in remittance-recipient economies. Our finding also reveals that remittances weaken the functioning of the credit channel at a higher level of remittance inflows, especially, when the remittances are higher than approximately five percent of GDP in remittance-recipient economies. Overall, our findings have broad policy implications revealing that policymakers have to pay attention to the possible effects of remittances on intermediate monetary transmission channels in achieving the monetary policy targets.