Workers' Remittances and the Equilibrium Real Exchange Rate: Theory and Evidence

43 Pages Posted: 1 Feb 2011

See all articles by Adolfo Barajas

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department

Ralph Chami

International Monetary Fund (IMF)

Dalia Hakura

International Monetary Fund (IMF)

Peter J. Montiel

Williams College - Department of Economics

Date Written: December 2010

Abstract

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

Suggested Citation

Barajas, Adolfo and Chami, Ralph and Hakura, Dalia and Montiel, Peter J., Workers' Remittances and the Equilibrium Real Exchange Rate: Theory and Evidence (December 2010). IMF Working Papers, Vol. , pp. 1-42, 2010. Available at SSRN: https://ssrn.com/abstract=1751400

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4152 (Phone)
202-623-6070 (Fax)

Ralph Chami

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6039 (Phone)
202-623-6068 (Fax)

Dalia Hakura

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Peter J. Montiel

Williams College - Department of Economics ( email )

Fernald House
Office: Fernald 14
Williamstown, MA 01267
United States
413-597-2103 (Phone)
413-597-4045 (Fax)

HOME PAGE: http://www.williams.edu/Economics/faculty/montiel.htm

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