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

_IMF Working Papers, December 1, 2010_

## Source details

**Canonical URL:** [Workers’ Remittances and the Equilibrium Real Exchange Rate: Theory and Evidence](https://www.imf.org/en/publications/wp/issues/2016/12/31/workers-remittances-and-the-equilibrium-real-exchange-rate-theory-and-evidence-24495)

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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

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### 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).*

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## Content in this bundle

- **1. Developing Countries: Workers’ Remittances**
  - [1. Developing Countries: Workers’ Remittances (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2010/_wp10287.pdf.md){rel="alternate" type="text/markdown"}
  - [1. Developing Countries: Workers’ Remittances (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2010/_wp10287.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/workers-remittances-and-the-equilibrium-real-exchange-rate-theory-and-evidence-24495_