Remittances and The Myth of the Exchange Rate's Power: The Case of Mexico

Abstract

Remittances to Mexico have increased more than six times in the past two decades. The boom in remittances can be explained mainly by U.S. economic performance as an attraction for Mexican workers, which implies more migration flows but also better-paying jobs. The immigrant’s income constraint––determined by employment and wages––plays the most important role in determining money transfers. The poor performance of Mexico’s economy and its inability to provide sufficient and well-paying jobs is another factor behind Mexican migration to the U.S. The foreign exchange rate (peso/USD) has little or nothing to do with the amount of remittances received by Mexico. Contrary to what some researchers argue, we find that despite the existence of some correlation between remittances and the peso's value vis-a-vis the dollar, there is no evidence of statistical causality from the peso to remittances during the two booms in remittances of the past two decades.

Keywords: Remittances, Exchange rate, Statistical Causality, Granger test, Mexican migrant workers, U.S. economy

JEL Classification: F22, F24, F31, F66, J61