Workers' Remittances and the Equilibrium Real Exchange Rate: Theory and Evidence
43 Pages Posted: 1 Feb 2011
Date Written: December 2010
This paper investigates the impact of workers’ remittances on equilibrium real exchange rates (ERER) in recipient economies. Using a small open economy model, it shows that standard "Dutch Disease" results of appreciation are substantially weakened or even overturned depending on: degree of openness; factor mobility between domestic sectors; counter cyclicality of remittances; the share of consumption in tradables; and the sensitivity of a country’s risk premium to remittance flows. Panel cointegration techniques on a large set of countries provide support for these analytical results, and show that ERER appreciation in response to sustained remittance flows tends to be quantitatively small.
Keywords: Capital inflows, Developing countries, Economic models, Exchange rate appreciation, Low-income developing countries, Real effective exchange rates, Workers remittances
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