What's Different About Monetary Policy Transmission in Remittance-Dependent Countries?

42 Pages Posted: 8 Apr 2016

See all articles by Adolfo Barajas

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department

Ralph Chami

International Monetary Fund (IMF)

Christian Ebeke

Centre d’Etudes et de Recherches sur le Développement International, CERDI-CNRS

Anne Oeking

International Monetary Fund (IMF)

Date Written: March 2016

Abstract

Despite welfare and poverty-reducing benefits for recipient households, remittance inflows have been shown to entail macroeconomic challenges; producing Dutch Disease-type effects through their upward (appreciation) pressure on real exchange rates, reducing the quality of institutions, delaying fiscal adjustment, and ultimately having an indeterminate effect on long-run growth. The paper explores an additional challenge, for monetary policy. Although they expand bank balance sheets, providing a stable flow of interest-insensitive funding, remittances tend to increase banks' holdings of liquid assets. This both reduces the need for an interbank market and severs the link between the policy rate and banks' marginal costs of funds, thus shutting down a major transmission channel. We develop a stylized model based on asymmetric information and a lack of transparent borrowers and undertake econometric analysis providing evidence that increased remittance inflows are associated with a weaker transmission. As independent monetary policy becomes impaired, this result is consistent with earlier findings that recipient countries tend to favor fixed exchange rate regimes.

Keywords: Worker’s Remittances, lending channel, banking sector, bank balance sheets, balance sheets, exchange, General, Fiscal and Monetary Policy in Development, All Countries, banking sector.,

JEL Classification: E50, F24, O17, O23

Suggested Citation

Barajas, Adolfo and Chami, Ralph and Ebeke, Christian and Oeking, Anne, What's Different About Monetary Policy Transmission in Remittance-Dependent Countries? (March 2016). IMF Working Paper No. 16/44. Available at SSRN: https://ssrn.com/abstract=2760214

Adolfo Barajas (Contact Author)

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)

Christian Ebeke

Centre d’Etudes et de Recherches sur le Développement International, CERDI-CNRS ( email )

65 Boulevard Francois Mitterrand
63000 Clermont-Ferrand Cedex 1
France

Anne Oeking

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
96
Abstract Views
387
rank
276,612
PlumX Metrics