{
  "title": "What’s Different about Monetary Policy Transmission in Remittance-Dependent Countries?",
  "publication": "IMF Working Papers, March 1, 2016",
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  "summary": "Despite welfare and poverty-reducing benefits for recipient households, remittance inflows have been shown to entail macroeconomic challenges; producing Dutch Disease-type effects through their upward (appreciation) pressure on real exchange rates, reducing the quality of institutions, delaying fisc",
  "sections": [
    {
      "heading": "Key findings and summary",
      "content": "- Remittance inflows provide welfare and poverty-reducing benefits for recipient households.\n- Remittances entail macroeconomic challenges, including:\n  - Producing Dutch Disease-type effects through their upward (appreciation) pressure on real exchange rates.\n  - Reducing the quality of institutions.\n  - Delaying fiscal adjustment.\n  - Ultimately having an indeterminate effect on long-run growth.\n- The paper explores an additional challenge for monetary policy: remittances expand bank balance sheets and provide a stable flow of interest-insensitive funding, but they tend to increase banks’ holdings of liquid assets.\n- Increased holdings of liquid assets:\n  - Reduce the need for an interbank market.\n  - Sever the link between the policy rate and banks’ marginal costs of funds.\n  - Shut down a major monetary policy transmission channel.\n- The authors develop a stylized model based on asymmetric information and a lack of transparent borrowers.\n- Econometric analysis provides evidence that increased remittance inflows are associated with a weaker monetary policy transmission.\n- As independent monetary policy becomes impaired, recipient countries’ behavior is consistent with earlier findings that they tend to favor fixed exchange rate regimes."
    },
    {
      "heading": "Model, methodology, and evidence",
      "content": "- Theoretical approach:\n  - Stylized model grounded in asymmetric information and a lack of transparent borrowers to explain how remittances affect bank behavior and transmission channels.\n- Empirical approach:\n  - Econometric analysis examining the association between remittance inflows and the strength of monetary policy transmission.\n- Core empirical result:\n  - Increased remittance inflows are associated with a weaker transmission of monetary policy."
    },
    {
      "heading": "Policy implications and institutional considerations",
      "content": "- Monetary policy effectiveness can be impaired in remittance-dependent countries because remittances:\n  - Increase banks’ liquid asset holdings and excess reserves.\n  - Reduce reliance on interbank markets and weaken the pass-through from policy rates to banks’ marginal funding costs.\n- Institutional and policy responses implied by the analysis:\n  - Recognition that standard interest-rate-based monetary policy may be less effective where remittance flows are large.\n  - The finding that impaired independent monetary policy is consistent with recipient countries favoring fixed exchange rate regimes.\n\n---\n\n Content in this bundle\n\n- wp1644\n  - wp1644 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp1644 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/whats-different-about-monetary-policy-transmission-in-remittance-dependent-countries-43762"
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    "Authors: Adolfo Barajas, Ralph Chami, Christian H Ebeke, Anne Oeking",
    "Published: March 1, 2016",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781513531236.001",
    "Remittance inflows provide welfare and poverty-reducing benefits for recipient households.",
    "Remittances entail macroeconomic challenges, including:",
    "The paper explores an additional challenge for monetary policy: remittances expand bank balance sheets and provide a stable flow of interest-insensitive funding, but they tend to increase banks’ holdings of liquid assets.",
    "Increased holdings of liquid assets:",
    "The authors develop a stylized model based on asymmetric information and a lack of transparent borrowers.",
    "Econometric analysis provides evidence that increased remittance inflows are associated with a weaker monetary policy transmission.",
    "As independent monetary policy becomes impaired, recipient countries’ behavior is consistent with earlier findings that they tend to favor fixed exchange rate regimes.",
    "Theoretical approach:",
    "Empirical approach:",
    "Core empirical result:",
    "Monetary policy effectiveness can be impaired in remittance-dependent countries because remittances:",
    "Institutional and policy responses implied by the analysis:",
    "**_wp1644**"
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