Beware of Emigrants Bearing Gifts : Optimal Fiscal and Monetary Policy in the Presence of Remittances

Author/Editor:

Michael T. Gapen ; Thomas F. Cosimano ; Ralph Chami

Publication Date:

March 1, 2006

Electronic Access:

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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:

This paper uses a stochastic dynamic general equilibrium model to investigate the influence of countercyclical remittances on the conduct of fiscal and monetary policy and trace their effects on real and nominal variables in a business cycle setting. We show that remittances raise disposable income and consumption, and insure against income shocks, thereby raising household welfare. However, remittances increase the correlation between labor and output, thereby producing a more volatile business cycle and increasing output and labor market risk. Optimal monetary policy in the presence of remittances deviates from the Friedman rule, highlighting the need for independent government policy instruments.

Series:

Working Paper No. 06/61

Subject:

Economic models Fiscal policy Monetary policy Optimal taxation Remittances Transfers of foreigners income Workers remittances

English

Publication Date:

March 1, 2006

ISBN/ISSN:

9781451863215/1018-5941

Stock No:

WPIEA2006061

Format:

Paper

Pages:

51

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