How Do Remittances Affect the Real Exchange Rate? An Empirical Investigation

IMF Working Papers, June 20, 2025

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Canonical URL: How Do Remittances Affect the Real Exchange Rate? An Empirical Investigation

Research objective: Examine how exchange rate regimes and the structure of the economy affect the impact of remittance flows on the real effective exchange rate (REER).
Sample and period: Data from a large sample of economies over 2008-21.
Context: Addresses a gap in empirical literature by focusing on the interplay between exchange rate regime and economic structure for policymakers.

Empirical approach: Controls for potential endogeneity in a dynamic panel and includes other variables determining exchange rate behavior.
Robustness checks: Results are robust to alternative classifications, data sources, specifications and sample size.

Flexible regimes:
- REER overvaluation correlates positively with remittance flows under flexible exchange rate regimes.
Fixed regimes:
- After controlling for endogeneity and other determinants, countries with fixed exchange rate regimes also experience appreciation, albeit smaller and slower relative to countries under flexible regimes.
Economic structure interactions:
- Larger REER appreciation effects are found for countries with import-to-GDP ratios lower than the world median.
- Larger REER appreciation effects are found for countries with remittances-to-GDP ratios higher than the world median.
Joint condition:
- For countries that receive relatively high remittances and import relatively less, the REER appreciates after a remittance shock, regardless of the exchange rate regime.

Monitor remittance-driven appreciation risks particularly in:
- Countries with flexible exchange rate regimes.
- Countries with remittances-to-GDP ratios higher than the world median.
- Countries with import-to-GDP ratios lower than the world median.
Design policy responses acknowledging that appreciation can occur under both flexible and fixed regimes, but with different magnitudes and speeds.

Subject: Balance of payments, Conventional peg, Exchange rate arrangements, Exchange rate flexibility, Foreign exchange, Real effective exchange rates, Remittances
Keywords: Annex i., Caribbean, Conventional peg, Dutch disease, Exchange rate arrangements, Exchange rate flexibility, Global, Real effective exchange rates, Real Exchange Rates, REER overvaluation, REER undervaluation, Remittance, remittance flow, remittance receiver, Remittances
Publication details: Pages: 36; Volume: 2025; Issue: 122; Series: Working Paper No. 2025/122; DOI: https://doi.org/10.5089/9798229013338.001; Stock No: WPIEA2025122; ISBN: 9798229013338; ISSN: 1018-5941
Authors and date: By Alina Carare, Juan P Celis, Metodij Hadzi-Vaskov, Yasumasa Morito; June 20, 2025

IMF Working Papers — "How Do Remittances Affect the Real Exchange Rate? An Empirical Investigation", Working Paper No. 2025/122