IMF Working Papers

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

Author/Editor:

Ralph Chami ; Adolfo Barajas ; Peter J Montiel ; Dalia S Hakura

Publication Date:

December 1, 2010

Electronic Access:

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Summary:

This paper investigates the impact of workers’ remittances on equilibrium real exchange rates (ERER) in recipient economies. Using a small open economy model, it shows that standard "Dutch Disease" results of appreciation are substantially weakened or even overturned depending on: degree of openness; factor mobility between domestic sectors; counter cyclicality of remittances; the share of consumption in tradables; and the sensitivity of a country’s risk premium to remittance flows. Panel cointegration techniques on a large set of countries provide support for these analytical results, and show that ERER appreciation in response to sustained remittance flows tends to be quantitatively small.

Series:

Working Paper No. 10/287

Subject:

Capital inflows Developing countries Economic models Exchange rate appreciation Foreign exchange International finance Low-income developing countries Real effective exchange rates Workers remittances