## How Do Transaction Costs Influence Remittances

_IMF Working Papers, November 4, 2022_

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## Bibliographic details
- Authors: Kangni R Kpodar, Patrick A. Imam
- Published: November 4, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400224270.001

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### Data and methodology
- 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.

### Main findings
- 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.

### Heterogeneity in cost-elasticity
- 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.

### Micro-evidence (USA-Mexico corridor)
- 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.

### Policy implications and interpretation
- 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.

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_Source: https://www.imf.org/en/publications/wp/issues/2022/11/04/how-do-transaction-costs-influence-remittances-525067_