Emerging Market Business Cycles with Remittance Fluctuations

33 Pages Posted: 1 Nov 2008

See all articles by Ceyhun Bora Durdu

Ceyhun Bora Durdu

Board of Governors of the Federal Reserve System

Serdar Sayan

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Date Written: September 9, 2008

Abstract

This paper analyzes the implications of remittance fluctuations for various macroeconomic variables and Sudden Stops. The paper employs a quantitative two-sector model of a small open economy with financial frictions calibrated to Mexican and Turkish economies, two major recipients, whose remittance receipts feature opposite cyclical characteristics. We find that remittances dampen the business cycles in Mexico, whereas they amplify the cycles in Turkey. Their quantitative effects in the long run, approximated by the stochastic steady state are mild. In the short run, however, remittances have quantitatively large impacts on the economy, when the economy is borrowing constrained. This is because agents in the economy cannot adjust their precautionary wealth to sudden tightening in credit, hence, fluctuations in remittances get magnified through an endogenous debt-deflation mechanism. Our findings suggest that procyclical (or countercyclical) remittances can play a significant deepening (or mitigating) role for Sudden Stops.

Keywords: Business cycles, remittances, sudden stops

JEL Classification: F41, F32, E32

Suggested Citation

Durdu, Ceyhun Bora and Sayan, Serdar, Emerging Market Business Cycles with Remittance Fluctuations (September 9, 2008). Available at SSRN: https://ssrn.com/abstract=1292433 or http://dx.doi.org/10.2139/ssrn.1292433

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Serdar Sayan

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