## 1. Remittances as a Share of GDP (in percent)

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---

### Key facts and context
- Over the past decade, remittances as a share of GDP in Tonga have varied between 30 and 55 percent, with an average of around 45 percent, making Tonga the leading recipient of remittances relative to GDP among Pacific island countries (PICs).
- Remittances are the main source of foreign exchange inflows in Tonga, accounting for over 67 percent of imports, while exports account for only 31 percent.
- Remittances to the Pacific region in the past decade primarily reflect the impact of increased migration due to low GDP growth and income levels in the destination countries.
- Remittances originate mainly from the United States, New Zealand, and Australia, where Tongans primarily work in the construction or agricultural sectors.

### Volatility and reliability
- Remittances appear to be a much more reliable source of foreign exchange than exports:
  - Coefficient of variation for remittances growth: 13
  - Coefficient of variation for exports growth: 22
- The smaller volatility of remittances growth has usually been explained by the strong altruistic relationships that Tongans living abroad maintain with their family in Tonga.

### Recipients and uses of remittances
- Two major recipients of remittances in Tonga:
  - Households
    - Primarily used for consumption rather than investment.
    - In some cases, used to help family members receive better healthcare and education.
  - Nonprofit organizations (mostly churches)
    - Mainly used for church construction and maintenance.

### Determinants of remittance flows (empirical findings)
- Panel regression of growth in remittances includes:
  - Changes in the real bilateral exchange rate
  - Real GDP growth in remitting countries
  - Unemployment rate in remitting countries
  - Interest rate differential between Tonga and remitting countries
- Directional findings (text interpretations preserved):
  - Remittances growth falls with an appreciation of the Tongan currency.
  - Remittances growth increases with higher real GDP growth in remitting countries.
  - Remittances growth increases with lower unemployment rate in remitting countries.
  - Tongans abroad do not compensate for changes in exchange rates (and possible higher transaction costs).

### Heterogeneity by recipient type
- Sensitivities differ by recipient:
  - Remittances to nonprofit organizations are more sensitive to:
    - A real appreciation of the Tongan currency.
    - The interest rate differential between Tonga and remitting countries.
  - Remittances to nonprofit organizations are less sensitive to real GDP growth or employment conditions in remitting countries compared with household remittances.

### Impact on Tonga’s real effective exchange rate and Dutch Disease
- Main empirical finding: remittance flows are not found to have a significant impact on the change in real effective exchange rate (REER).
- Possible explanation offered:
  - Remittances to Tonga are primarily used for consumption, most of which is imported, with little impact on demand for nontradable goods, and hence little pressure for the currency to appreciate in real terms.

### Data and model specification (summary)
- Data: Remittances to Tonga for 1994Q1–2009Q1 from Australia, New Zealand, and the United States; workers’ remittances only; available by country of origin and by recipient type (households, nonprofit organizations).
- Remittances determinants model: dynamic panel GMM; dependent variable = first-difference ln(remittances); key regressors include one-period change in bilateral real exchange rate (foreign currency per Pa’anga), remitting-country real GDP growth, remitting-country unemployment, interest rate differential; instruments: lagged remitting-country variables and lagged interest rate differentials.
- REER effects model: dependent variable = one-period change in the REER; RHS includes ln(remittances), terms of trade, weighted financial openness differential, weighted trade openness differential, weighted M2/GDP differential; instruments: lagged remittances growth and lagged remitting-country macro variables weighted by remittance shares.

### Selected summary statistics (1994Q1–2009Q1 excerpts)
- Tonga:
  - Growth in Total Remittances: Obs 600, Mean 0.02, Median 0.03, Std. Dev. 0.20, Min -0.47, Max 0.45
  - Growth in Total Remittances to Households: Obs 600, Mean 0.03, Median 0.06, Std. Dev. 0.18, Min -0.40, Max 0.38
  - Growth in Total Remittances to Non-profit Organizations: Obs 600, Mean 0.00, Median 0.05, Std. Dev. 0.46, Min -1.58, Max 0.83
  - Appreciation in REER: Obs 600, Mean 0.00, Median 0.00, Std. Dev. 0.02, Min -0.07, Max 0.05
  - 3-month Interest Rate (in percent): Obs 611, Mean 11.36, Median 11.35, Std. Dev. 0.63, Min 9.03, Max 12.65
  - Inflation (in percent): Obs 611, Mean 1.46, Median 1.56, Std. Dev. 1.47, Min -2.58, Max 4.51
- Australia (selected):
  - Growth in Remittances to Tonga: Obs 600, Mean 0.00, Median -0.01, Std. Dev. 0.27, Min -0.74, Max 0.60
  - GDP Growth (in percent): Obs 61, Mean 0.86, Median 0.84, Std. Dev. 0.59, Min -0.93, Max 2.62
  - Unemployment Rate (in percent): Obs 61, Mean 6.5, Median 6.37, Std. Dev. 1.56, Min 4.03, Max 10.13
- New Zealand (selected):
  - Growth in Remittances to Tonga: Obs 600, Mean 0.00, Median -0.01, Std. Dev. 0.28, Min -0.98, Max 0.56
  - GDP Growth (in percent): Obs 61, Mean 0.72, Median 0.86, Std. Dev. 0.79, Min -1.00, Max 2.72
- United States (selected):
  - Growth in Remittances to Tonga: Obs 600, Mean 0.02, Median 0.05, Std. Dev. 0.23, Min -0.59, Max 0.54
  - GDP Growth (in percent): Obs 61, Mean 0.66, Median 0.73, Std. Dev. 0.66, Min -1.65, Max 1.95

### Empirical results — determinants of remittances (Table 3, dependent variable = first-difference ln(remittances))
- Lagged dependent variable (first lag) coefficient:
  - Total: -0.324*** (std. err. 0.036)
  - Households: -0.298*** (0.043)
  - Non-profit Organizations: -0.374*** (0.049)
- One-period increase in real bilateral exchange rate (foreign currency per Pa'anga) — increase denotes real appreciation of Pa'anga:
  - Total: -1.736*** (0.354)
  - Households: -1.163*** (0.407)
  - Non-profit Organizations: -4.686*** (0.485)
  - Text interpretation: A 1-percentage-point real appreciation in the Tongan currency against remitting country’s currency is associated with a 2-percentage-point decrease in remittances growth.
- Real GDP growth in remitting country (first lag, in percent):
  - Total: 0.044*** (0.008)
  - Households: 0.036*** (0.01)
  - Non-profit Organizations: 0.005 (0.024)
  - Text interpretation: A 1-percentage-point increase in real GDP growth in remitting countries is associated with a 4-percentage-points increase in remittances growth.
- Unemployment rate in remitting country (first lag, in percent):
  - Total: -0.012*** (0.005)
  - Households: -0.005 (0.01)
  - Non-profit Organizations: -0.002 (0.019)
  - Text interpretation: A 1-percentage-point increase in the unemployment rate in remitting countries is associated with a 1-percentage-point decrease in remittances growth.
- Interest rate differential between Tonga and remitting country (first lag, in percent):
  - Total: 0.021*** (0.003)
  - Households: 0.012*** (0.001)
  - Non-profit Organizations: 0.064*** (0.009)
  - Text interpretation: A 1-percentage-point increase in the interest rate differential is associated with a 2-percentage-point increase in remittances growth.

### Key contrasts: households vs nonprofit organizations (text interpretations preserved)
- Sensitivity to appreciation of Pa’anga:
  - Households: 1-percentage-point appreciation → 1-percentage-point decrease in growth of remittances to households (text).
  - Non-profit organizations: 1-percentage-point appreciation → 5-percentage-point decline in growth of remittances to non-profit organizations (text).
- Sensitivity to interest rate differential:
  - Households: 1-percentage-point increase in interest rate differential → 1-percentage-point increase in growth of remittances to households (text).
  - Non-profit organizations: 1-percentage-point increase in interest rate differential → 6-percentage-point increase in growth of remittances to nonprofit organizations (text).
- Real GDP growth in remitting countries:
  - Statistically significant positive effect on remittances to households.
  - Not statistically significant for remittances to non-profit organizations.
- Unemployment rate in remitting countries:
  - Significant negative effect for total remittances.
  - Not significant for remittances to households or non-profit organizations once real GDP growth is controlled for.

### Empirical results — effects on REER (Table 4, equation (2))
- Main finding: remittance flows are not found to have a significant impact on the change in real effective exchange rate.
- Reported coefficients (selected):
  - First-difference ln(total remittances):
    - column (1) -0.012 (0.036)
    - column (2) -0.019 (0.078)
    - column (3) -0.064 (0.067)
  - Change in terms of trade:
    - column (1) 0.008 (0.014)
    - column (2) 0.019 (0.022)
    - column (3) 0.019 (0.022)
  - Weighted M2/GDP differential (first lag):
    - column (2) 0.000 (0.15)
    - column (3) -0.092 (0.126)
  - Weighted financial openness differential (first lag):
    - column (2) -0.002 (0.024)
    - column (3) -0.028 (0.032)
  - Weighted trade openness differential (first lag):
    - column (2) 0.076 (0.049)
    - column (3) 0.050 (0.051)
  - Constant:
    - column (1) 0.002 (0.003)
    - column (2) -0.053 (0.104)
    - column (3) -0.086 (0.061)
  - Number of observations:
    - column (1) 58
    - column (2) 34
    - column (3) 34
- Robustness checks:
  - Results are robust to different weighting schemes for remitting countries:
    - Column (2) uses shares of remittances as weight.
    - Column (3) uses share of PPP GDP of remitting countries as weight.
  - Differentiating remittances to households from those to nonprofit organizations yields similar (non-significant) results (not tabulated).

### Statistical diagnostics (GMM determinants regressions)
- Number of observations: 174 for each column.
- Hansen's J statistic p-values:
  - Total: 0.6576
  - Households: 0.6156
  - Non-profit Organizations: 0.7174
- Significance notation in tables: *,**,*** denote P-value less than 0.1, 0.05, and 0.01, respectively.

### Conclusion (Section IV)
- Main conclusions:
  - Macroeconomic conditions in remitting countries and exchange rate fluctuations influence remittances to Tonga.
  - Remittances growth:
    - Falls with an appreciating Pa’anga.
    - Increases with higher real GDP growth in remitting countries.
    - Increases with lower unemployment rate in remitting countries.
  - No evidence of ―Dutch Disease‖ in Tonga:
    - The real effective exchange rate does not respond significantly to changes in remittance flows.
    - One possible reason: remittances to Tonga are primarily used for consumption, most of which is imported, implying little impact on demand for nontradable goods and hence limited pressure for currency appreciation.

*Source: _wp1118 - 1. Remittances as a Share of GDP (in percent).*

### 1. Remittances as a Share of GDP (in percent) ......................................................................... 

### Remittances as a Share of GDP (in percent)

### Key facts and context
- Over the past decade, remittances as a share of GDP in Tonga have varied between 30 and 55 percent, with an average of around 45 percent, making Tonga the leading recipient of remittances relative to GDP among Pacific island countries (PICs).
- Remittances are the main source of foreign exchange inflows in Tonga, accounting for over 67 percent of imports, while exports account for only 31 percent.
- Remittances to the Pacific region in the past decade primarily reflect the impact of increased migration due to low GDP growth and income levels in the destination countries.
- Remittances originate mainly from the United States, New Zealand, and Australia, where Tongans primarily work in the construction or agricultural sectors.

### Volatility and reliability
- Remittances appear to be a much more reliable source of foreign exchange than exports:
  - Coefficient of variation for remittances growth: 13
  - Coefficient of variation for exports growth: 22
- The smaller volatility of remittances growth has usually been explained by the strong altruistic relationships that Tongans living abroad maintain with their family in Tonga.

### Recipients and uses of remittances
- Two major recipients of remittances in Tonga:
  - Households
    - Primarily used for consumption rather than investment.
    - In some cases, used to help family members receive better healthcare and education.
  - Nonprofit organizations (mostly churches)
    - Mainly used for church construction and maintenance.

### Determinants of remittance flows (empirical findings)
- The paper uses a panel regression of the growth in remittances on:
  - Changes in the real bilateral exchange rate
  - Real GDP growth in remitting countries
  - Unemployment rate in remitting countries
  - Interest rate differential between Tonga and remitting countries
- Estimated parameter results (directional findings as reported):
  - Remittances growth falls with an appreciation of the Tongan currency.
  - Remittances growth increases with higher real GDP growth in remitting countries.
  - Remittances growth increases with lower unemployment rate in remitting countries.
  - Tongans abroad do not compensate for changes in exchange rates (and possible higher transaction costs).

### Heterogeneity by recipient type
- Sensitivities differ by whether remittances are sent to households or nonprofit organizations:
  - Remittances to nonprofit organizations are more sensitive to:
    - A real appreciation of the Tongan currency.
    - The interest rate differential between Tonga and remitting countries.
  - Remittances to nonprofit organizations are less sensitive to real GDP growth or employment conditions in remitting countries compared with household remittances.

### Impact on Tonga’s real effective exchange rate and Dutch Disease
- The analysis does not find evidence of "Dutch Disease" in Tonga:
  - The real effective exchange rate does not respond significantly to changes in remittance flows.
- Possible explanation offered:
  - Remittances to Tonga are primarily used for consumption, most of which is imported with little impact on the demand for nontradable goods, and hence there is little pressure for the currency to appreciate in real terms.

*Source: _wp1118 - 1. Remittances as a Share of GDP (in percent).*

### Section III presents the empirical evidence, and Section IV concludes the paper.

### Section III presents the empirical evidence, and Section IV concludes the paper.

### II. LITERATURE REVIEW — A. Determinants of Remittances
- Remittances are found to be guided by:
  - Altruistic motives: remittances aim to support recipients' daily expenditure and/or compensate for catastrophic events.
    - In this case, remittances are negatively correlated with economic conditions (real GDP growth and employment) in the home country.
    - The end use of remittances is primarily consumption.
  - Investment motives: remittances aim to take advantage of high returns or other opportunities for profits in the home country.
    - In this case, remittances are positively related to economic conditions and investment opportunities in the home country (as indicated by real GDP growth and real interest rate differential between the home country and the remitting country).
- Remittances likely depend on expatriates’ income and bilateral exchange rates between the home and remitting country.
  - Proxies: real GDP growth (expected positive with remittance growth) and unemployment rates (expected negative with remittance growth).
  - Exchange rate impact is ambiguous because expatriates might send fixed foreign-currency amounts or fixed local-currency amounts.
- Empirical findings summarized from literature cited in the paper:
  - Chami, Fullenkamp, and Jahjah (2005): income gap has a negative and significant effect on remittances-to-GDP ratio; real interest rate differential has a positive but insignificant effect.
  - Browne and Mineshima (2007): remittances to the Pacific depend on rate of real GDP growth in remitting countries, distance, common language, aggregate stock of migrants, concentration of foreign trade with regional partners, and shared historical/social factors.
  - Chamon, Semblat, and Morant (2005): remittances to Samoa are influenced by growth in remitting countries and in Samoa and changes in the exchange rate; Samoan currency depreciation associated with an increase in remittance flows in Samoan currency; growth in remitting countries positive and significant for remittances to Samoa; growth in Samoa negative and significant.

### II. LITERATURE REVIEW — B. Impact of Remittances on the Real Effective Exchange Rate
- Mechanisms:
  - Remittances can affect long-term growth via the exchange rate channel by altering returns to factors in traded vs nontraded sectors and changing relative prices of traded/nontraded consumption goods.
- Empirical evidence is mixed:
  - Studies finding appreciation associated with remittances: Bourdet and Falck (2003) for Cape Verde (1980–2000); Hyder and Mahboob (2005); Saadi-Sedik and Petri (2006) for Pakistan and Jordan; Amuedo-Dorantes and Pozo (2004); Holzner (2006) worldwide sample.
  - Rajan and Subramanian (2005) find remittances not associated with slower growth in labor-intensive or more export-oriented manufacturing, suggesting no ―Dutch disease‖ effect.

### III. EMPIRICAL ANALYSIS — A. Data Description and Model Specification
- Data:
  - Remittances to Tonga for the period 1994Q1–2009Q1 from Australia, New Zealand, and the United States.
  - Remittances series represent workers’ remittances only (provided by Tongan authorities).
  - Remittances available by country of origin and by type of recipient: households and nonprofit organizations (mostly churches).
- Advantages over many cross-country studies:
  - Uses workers’ remittances only (excludes migrants’ transfers and employee compensation).
  - Data by country of origin allows control for remitting-country fixed effects.
  - Data by recipient type distinguishes consumption-financing remittances (households) from remittances for construction/maintenance (nonprofit organizations).
- Visual relationships (described):
  - Positive correlation between remittances growth and GDP growth in remitting countries.
  - Remittances growth seems negatively related to an appreciation of the Tongan currency (bilateral).
  - Clear negative relationship between remittances growth and GDP growth in Tonga, and between remittances growth and changes in real effective exchange rate.
- Model for determinants of remittances (dynamic panel GMM, equation (1) in paper):
  - Dependent variable: growth of remittances from country i in quarter t (first-difference ln(remittances)).
  - Key regressors include one-period change in bilateral real exchange rate (appreciation of Pa’anga), remitting-country real GDP growth, remitting-country unemployment, and interest rate differential between Tonga and remitting country.
  - Instruments to address endogeneity: lagged real GDP growth of remitting countries, lagged unemployment rate in remitting countries, and lagged interest rate differentials between Tonga and remitting countries.
- Variable definitions and sources (Table 1 highlights):
  - Remittances: In T$. Source: Tongan authorities.
  - Real exchange rate: Bilateral real exchange rate, foreign currency per Pa’anga. Source: International Financial Statistics, IMF.
  - Real effective exchange rate: Source: International Financial Statistics, IMF.
  - GDP growth: Growth of gross domestic product in local currency, constant price. Source: World Economic Outlook, IMF, October 2009.
  - Unemployment rate: Source: World Economic Outlook, IMF, October 2009.
  - Interest rate: Three-month treasury bills for Australia, New Zealand, and the United States. Three-month lending rates for Tonga. Sources: RBA Statistical Bulletin, RBNZ Interest Rates Table B2, Federal Reserve table H15, and International Financial Statistics, IMF.
  - Inflation rate: CPI inflation. Sources: Tongan authorities and International Financial Statistics, IMF.
  - Terms of trade: Exports price index/Imports price index. Source: Tongan authorities.
  - Trade openness: Exports and imports of goods and services divided by GDP in current price. Sources: Tongan authorities and World Economic Outlook, IMF, October 2009.
  - Financial openness: Foreign assets and foreign liabilities divided by GDP in current price. Sources: International Financial Statistics and World Economic Outlook, IMF, October 2009.
  - M2/GDP: M2 divided by GDP in current price. Sources: International Financial Statistics and World Economic Outlook, IMF, October 2009.
- Summary statistics (selected entries from Table 2, 1994Q1–2009Q1):
  - Tonga:
    - Growth in Total Remittances: Obs 600, Mean 0.02, Median 0.03, Std. Dev. 0.20, Min -0.47, Max 0.45
    - Growth in Total Remittances to Households: Obs 600, Mean 0.03, Median 0.06, Std. Dev. 0.18, Min -0.40, Max 0.38
    - Growth in Total Remittances to Non-profit Organizations: Obs 600, Mean 0.00, Median 0.05, Std. Dev. 0.46, Min -1.58, Max 0.83
    - Appreciation in REER: Obs 600, Mean 0.00, Median 0.00, Std. Dev. 0.02, Min -0.07, Max 0.05
    - 3-month Interest Rate (in percent): Obs 611, Mean 11.36, Median 11.35, Std. Dev. 0.63, Min 9.03, Max 12.65
    - Inflation (in percent): Obs 611, Mean 1.46, Median 1.56, Std. Dev. 1.47, Min -2.58, Max 4.51
  - Australia (selected):
    - Growth in Remittances to Tonga: Obs 600, Mean 0.00, Median -0.01, Std. Dev. 0.27, Min -0.74, Max 0.60
    - GDP Growth (in percent): Obs 61, Mean 0.86, Median 0.84, Std. Dev. 0.59, Min -0.93, Max 2.62
    - Unemployment Rate (in percent): Obs 61, Mean 6.5, Median 6.37, Std. Dev. 1.56, Min 4.03, Max 10.13
  - New Zealand (selected):
    - Growth in Remittances to Tonga: Obs 600, Mean 0.00, Median -0.01, Std. Dev. 0.28, Min -0.98, Max 0.56
    - GDP Growth (in percent): Obs 61, Mean 0.72, Median 0.86, Std. Dev. 0.79, Min -1.00, Max 2.72
  - United States (selected):
    - Growth in Remittances to Tonga: Obs 600, Mean 0.02, Median 0.05, Std. Dev. 0.23, Min -0.59, Max 0.54
    - GDP Growth (in percent): Obs 61, Mean 0.66, Median 0.73, Std. Dev. 0.66, Min -1.65, Max 1.95
- Model for remittances’ effects on real effective exchange rate (equation (2) in paper):
  - Dependent variable: one-period change in the REER (increase denotes appreciation of Pa'anga).
  - Right-hand-side variables include: ln(remittances), terms of trade (TOT), weighted financial openness differential, weighted trade openness differential, weighted M2/GDP differential between Tonga and remitting countries.
  - Instruments used to address endogeneity: lagged growth in total remittances, lagged real GDP growth and unemployment rate of remitting countries, lagged real interest rate differential between Tonga and remitting countries (weighted by average shares of total remittances over 1994Q1–2009Q1).

### III. EMPIRICAL ANALYSIS — B. Empirical Results (equations (1) and (2))
- Determinants of remittances (estimates reported in Table 3; dependent variable = first-difference ln(remittances)):
  - Lagged dependent variable (first lag) coefficient:
    - Total: -0.324*** (std. err. 0.036)
    - Households: -0.298*** (0.043)
    - Non-profit Organizations: -0.374*** (0.049)
  - One-period increase in real bilateral exchange rate (foreign currency per Pa'anga) — an increase denotes real appreciation of Pa'anga:
    - Total: -1.736*** (0.354)
    - Households: -1.163*** (0.407)
    - Non-profit Organizations: -4.686*** (0.485)
    - Interpretation in text: A 1-percentage-point real appreciation in the Tongan currency against remitting country’s currency is associated with a 2-percentage-point decrease in remittances growth (text statement).
  - Real GDP growth in remitting country (first lag, in percent):
    - Total: 0.044*** (0.008)
    - Households: 0.036*** (0.01)
    - Non-profit Organizations: 0.005 (0.024)
    - Text interpretation: A 1-percentage-point increase in real GDP growth in remitting countries is associated with a 4-percentage-points increase in remittances growth.
  - Unemployment rate in remitting country (first lag, in percent):
    - Total: -0.012*** (0.005)
    - Households: -0.005 (0.01)
    - Non-profit Organizations: -0.002 (0.019)
    - Text interpretation: A 1-percentage-point increase in the unemployment rate in remitting countries is associated with a 1-percentage-point decrease in remittances growth.
  - Interest rate differential between Tonga and remitting country (first lag, in percent):
    - Total: 0.021*** (0.003)
    - Households: 0.012*** (0.001)
    - Non-profit Organizations: 0.064*** (0.009)
    - Text interpretation: A 1-percentage-point increase in the interest rate differential is associated with a 2-percentage-point increase in remittances growth.
- Key contrasts between household and non-profit remittances:
  - Sensitivity to appreciation of Pa’anga:
    - Households: 1-percentage-point appreciation → 1-percentage-point decrease in growth of remittances to households (text).
    - Non-profit organizations: 1-percentage-point appreciation → 5-percentage-point decline in growth of remittances to non-profit organizations (text).
  - Sensitivity to interest rate differential:
    - Households: 1-percentage-point increase in interest rate differential → 1-percentage-point increase in growth of remittances to households (text).
    - Non-profit organizations: 1-percentage-point increase in interest rate differential → 6-percentage-point increase in growth of remittances to nonprofit organizations (text).
  - Real GDP growth in remitting countries:
    - Statistically significant positive effect on remittances to households.
    - Not statistically significant for remittances to non-profit organizations.
  - Unemployment rate in remitting countries:
    - Significant negative effect for total remittances.
    - Not significant for remittances to households or non-profit organizations once real GDP growth is controlled for.
- Economic impacts of remittance flows on real effective exchange rate (Table 4; equation (2)):
  - Main finding: remittance flows are not found to have a significant impact on the change in real effective exchange rate.
  - Reported coefficients (selected, with standard errors in parentheses as in table):
    - First-difference ln(total remittances): column (1) -0.012 (0.036); column (2) -0.019 (0.078); column (3) -0.064 (0.067)
    - Change in terms of trade: column (1) 0.008 (0.014); column (2) 0.019 (0.022); column (3) 0.019 (0.022)
    - Weighted M2/GDP differential (first lag): column (2) 0.000 (0.15); column (3) -0.092 (0.126)
    - Weighted financial openness differential (first lag): column (2) -0.002 (0.024); column (3) -0.028 (0.032)
    - Weighted trade openness differential (first lag): column (2) 0.076 (0.049); column (3) 0.050 (0.051)
    - Constant: column (1) 0.002 (0.003); column (2) -0.053 (0.104); column (3) -0.086 (0.061)
    - Number of observations: column (1) 58; column (2) 34; column (3) 34
  - Robustness checks:
    - Results are robust to different weighting schemes for remitting countries:
      - Column (2) uses shares of remittances as weight.
      - Column (3) uses share of PPP GDP of remitting countries as weight.
    - Differentiating remittances to households from those to nonprofit organizations yields similar (non-significant) results (not tabulated).
  - Interpretation offered in text:
    - Absence of a significant effect on REER is consistent with remittances being primarily used to finance consumption that is mostly imported, thus having little impact on demand for nontradable goods and limited pressure for currency appreciation.
- Statistical diagnostics reported for GMM determinants regressions (Table 3):
  - Number of observations: 174 for each column.
  - Hansen's J statistic p-values: 0.6576 (Total), 0.6156 (Households), 0.7174 (Non-profit Organizations).
  - Significance notation: *,**,*** denote P-value less than 0.1, 0.05, and 0.01, respectively.

### IV. CONCLUSION
- Main conclusions:
  - Macroeconomic conditions in remitting countries and exchange rate fluctuations influence remittances to Tonga.
  - Remittances growth:
    - Falls with an appreciating Pa’anga.
    - Increases with higher real GDP growth in remitting countries.
    - Increases with lower unemployment rate in remitting countries.
  - No evidence of ―Dutch Disease‖ in Tonga:
    - The real effective exchange rate does not respond significantly to changes in remittance flows.
    - One possible reason: remittances to Tonga are primarily used for consumption, most of which is imported, implying little impact on demand for nontradable goods and hence limited pressure for currency appreciation.

*Source: _wp1118 - Section III presents the empirical evidence, and Section IV concludes the paper.*

### REFERENCES

### _wp1118 - REFERENCES

### Academic and policy research on remittances and financial development
- Aggarwal, Reena, Asli Demirguc-Kunt, and Maria Soledad Martinez Peria, 2006, Do Workers’ Remittances Promote Financial Development? Policy Research Working Paper No. 3957 (Washington: World Bank).
- Giuliano, Paola, and Marta Ruiz-Arranz, 2005, Remittances, Financial Development, and Growth, IMF Working Paper 05/234 (Washington: International Monetary Fund).
- Chami, Ralph, Adolfo Barajas, Thomas Cosimano, Connel Fullenkamp, Michael Gapen, and Peter Montiel, 2008, Macroeconomic Consequences of Remittances, IMF Occasional Paper 259 (Washington: International Monetary Fund).
- Bourdet, Yves, and Hans Falck, 2003, Emigrants’ Remittances and Dutch Disease in Cape Verde, Working Paper, No. 11 (Kristianstad, Sweden: Kristianstad University College).
- Browne, Christopher and Aiko Mineshima, 2007, Remittances in the Pacific Region, IMF Working Paper, WP/07/35 (Washington: International Monetary Fund).
- Lucas, Robert E.B., and Oded Stark, 1985, Motivations to Remit: Evidence from Botswana, Journal of Political Economy, Vol. 93, pp. 901–18.
- Johnson, G.E., and W.E. Whitelaw, 1974, Urban-Rural Income Transfers in Kenya: An Estimated-Remittances Function, Economic Development and Cultural Change, Vol. 22, pp. 473–79.

### Country and regional selected-issues studies
- Chamon, Marcos, Romuald Semblat, and Anne Morant, 2005, Samoa-Selected Issues and Statistical Appendix, SM/05/181(Washington: International Monetary Fund).
- Almekinders, Geert, Svitlana Maslova, and Zeno Abenoja, 2009, Bangladesh-Selected Issues (SM/09/300), International Monetary Fund.
- Saadi-Sedik, Tahsin, and Martin Petri, 2006, To Smooth or Not to Smooth: The Impact of Grants and Remittances on the Equilibrium Real Exchange Rate in Jordan, IMF Working Paper 06/257 (Washington: International Monetary Fund).
- Hyder, Zulfiqar, and Adil Mahboob, 2005, Equilibrium Real Effective Exchange Rate and Exchange Rate Misalignment in Pakistan. (Islamabad: State Bank of Pakistan). Available via the Internet: http://www.sbp.org.pk/research/conf/Session_IV_Zulfiqar_Adil.pdf

### Studies on exchange rates, real exchange rate distortion, and aid interaction
- Holzner, Mario, 2006, Real Exchange Rate Distortion in Southeast Europe, Global Development Network Southeast Europe. (Vienna: Vienna Institute for International Economics). Available via the Internet: http://www.wiiw.ac.at/balkan/files/HOLZNER.pdf
- Rajan, Raghuram, and Arvind Subramanian, 2005, What Undermines Aid’s Impact on Growth?, IMF Working Paper 05/126 and NBER Working Paper No. 11657 (Washington: International Monetary Fund) (Cambridge, Massachusetts: National Bureau of Economic Research).
- Chamon, Marcos, Romuald Semblat, and Anne Morant, 2005, Samoa-Selected Issues and Statistical Appendix, SM/05/181(Washington: International Monetary Fund).
- Saadi-Sedik, Tahsin, and Martin Petri, 2006, To Smooth or Not to Smooth: The Impact of Grants and Remittances on the Equilibrium Real Exchange Rate in Jordan, IMF Working Paper 06/257 (Washington: International Monetary Fund).

### Global outlooks and data sources
- International Monetary Fund, 2005, World Economic Outlook, April 2005: Globalization and External Imbalances, World Economic and Financial Surveys (Washington).
- World Bank, 2005, Global Economic Prospects 2006: Economic Implications of Remittances and Migration (Washington).
- World Bank, 2006, World Development Indicators, http://devdata.worldbank.org/data-query/

*Reference list from _wp1118 - REFERENCES*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2011/_wp1118.pdf_