How Do Transaction Costs Influence Remittances

IMF Working Papers, November 4, 2022

Source details

Quarterly panel database on remittances covering 71 countries over the period 2011Q1- 2020Q4.
High-frequency and dynamic setting to estimate the elasticity of remittances to transaction costs.
Supplementary micro data analysis from the USA-Mexico corridor.

Cost reductions have a short-term positive impact on remittances that dissipates beyond one quarter.
Reducing transaction costs to the Sustainable Development Goal target of 3 percent could generate an additional US$32bn in remittances.
The estimated additional US$32bn is higher than the direct cost savings from lower transaction costs, suggesting an absolute elasticity greater than one.

Remittance cost-mitigation factors associated with a lower elasticity of remittance to transaction costs:
- Higher competition in the remittance market.
- A deeper financial sector.
- Adequate correspondent banking relationships.
Remittance cost-adaptation factors coinciding with remittances being less sensitive to transaction costs:
- Enhanced transparency in remittance costs.
- Improved financial literacy.
- Higher ICT development.

Migrants facing higher transaction costs tend to remit less.
The negative effect of higher transaction costs on remittances is less pronounced for:
- Skilled migrants.
- Migrants with access to a bank account.

Reductions in transaction costs can raise remittance flows materially in the short run, with potential multiplier effects beyond direct savings.
Strengthening market competition, deepening financial sectors, maintaining correspondent banking relationships, improving transparency, enhancing financial literacy, and expanding ICT can reduce remittances’ sensitivity to transaction costs.
Policy design should consider heterogeneity across countries and migrant types when targeting transaction-cost reductions.