What’s Different about Monetary Policy Transmission in Remittance-Dependent Countries?

Author/Editor: Adolfo Barajas ; Ralph Chami ; Christian Ebeke ; Anne Oeking
Publication Date: March 01, 2016
Electronic Access: Free Full text (PDF file size is 1,067KB).
Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: Despite welfare and poverty-reducing benefits for recipient households, remittance inflows have been shown to entail macroeconomic challenges; producing Dutch Disease-type effects through their upward (appreciation) pressure on real exchange rates, reducing the quality of institutions, delaying fiscal adjustment, and ultimately having an indeterminate effect on long-run growth. The paper explores an additional challenge, for monetary policy. Although they expand bank balance sheets, providing a stable flow of interest-insensitive funding, remittances tend to increase banks’ holdings of liquid assets. This both reduces the need for an interbank market and severs the link between the policy rate and banks’ marginal costs of funds, thus shutting down a major transmission channel. We develop a stylized model based on asymmetric information and a lack of transparent borrowers and undertake econometric analysis providing evidence that increased remittance inflows are associated with a weaker transmission. As independent monetary policy becomes impaired, this result is consistent with earlier findings that recipient countries tend to favor fixed exchange rate regimes.
Series: Working Paper No. 16/44
Subject(s): Monetary policy | Monetary transmission mechanism | Remittances | Capital inflows | Banking sector | Loans | Econometric models | Regression analysis

Publication Date: March 01, 2016
ISBN/ISSN: 9781513531236/1018-5941 Format: Paper
Stock No: WPIEA2016044 Pages: 41
US$18.00 (Academic Rate:
US$18.00 )
Please address any questions about this title to publications@imf.org