Workers’ Remittances and the Equilibrium Real Exchange Rate: Theory and Evidence

IMF Working Papers, December 1, 2010

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Workers’ Remittances and the Equilibrium Real Exchange Rate: Theory and Evidence

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Bibliographic details

• Authors: Ralph Chami, Adolfo Barajas, Peter J Montiel, Dalia S Hakura
• Published: December 1, 2010
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781455210947.001

Analytical framework

• Uses a small open economy model to investigate the impact of workers’ remittances on equilibrium real exchange rates (ERER).
• Identifies key model parameters and mechanisms that determine whether remittances lead to ERER appreciation or not:
  • degree of openness;
  • factor mobility between domestic sectors;
  • counter cyclicality of remittances;
  • the share of consumption in tradables;
  • the sensitivity of a country’s risk premium to remittance flows.

Empirical approach

• Employs panel cointegration techniques on a large set of countries to test the analytical implications of the model.
• Compares theoretical predictions with cross-country evidence on remittance inflows and ERER movements.

Key findings and quantitative conclusions

• Standard "Dutch Disease" results of appreciation are substantially weakened or even overturned depending on model parameters listed above.
• Panel cointegration results provide support for the analytical results from the model.
• ERER appreciation in response to sustained remittance flows tends to be quantitatively small.

Policy implications and considerations

• The exchange rate effects of remittance inflows are conditional; policy responses should account for:
  • the degree of openness of the recipient economy;
  • the extent of factor mobility across domestic sectors;
  • whether remittances are counter cyclical;
  • the share of consumption allocated to tradables;
  • how remittance flows affect the country’s risk premium.
• Given that ERER appreciation from sustained remittances tends to be quantitatively small, blanket concerns about large appreciation effects may be overstated without considering the conditional factors identified.

IMF Working Paper No. 2010/287 by Ralph Chami, Adolfo Barajas, Peter J Montiel, and Dalia S Hakura (December 1, 2010).

Content in this bundle

• 1. Developing Countries: Workers’ Remittances
  • 1. Developing Countries: Workers’ Remittances (Markdown version)
  • 1. Developing Countries: Workers’ Remittances (PDF)