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Workers' Remittances and Current Account Reversals

63 Pages Posted: 19 Apr 2006  

Matteo Bugamelli

Bank of Italy

Francesco Paternò

Bank of Italy

Date Written: January 2006

Abstract

This paper combines the literature on financial crises with that on international migrations by investigating whether the increasingly large flows of workers' remittances can help reduce the probability of current account reversals. The rationale for this stands in the great stability and low cyclicality of remittances as compared to other private capital flows: these properties, combined with the fact that remittances are cheap inflows of foreign currencies, might reduce the probability that external financing gets restrained triggering a sharp current account adjustment. We find that remittances can indeed have such a beneficial effect. In particular, we show that a high level of remittances, as a ratio of GDP, makes the relationship between a decreasing stock of international reserves (over GDP) and a higher probability of current account reversals less stringent. The same occurs, though less neatly, for the positive relationship between an increasing stock of external debt (over GDP) and the probability of reversals. Our results point also to a threshold effect of remittances: the mechanism just described is, in fact, much stronger when remittances are above 3 percent of GDP.

Notes: Downloadable document is in Italian.

Keywords: crisi finanziarie, current account reversal, rimesse dei lavoratori emigrati

JEL Classification: F32, F36, J61, O1

Suggested Citation

Bugamelli, Matteo and Paternò, Francesco, Workers' Remittances and Current Account Reversals (January 2006). Bank of Italy Economic Research Paper No. 573. Available at SSRN: https://ssrn.com/abstract=895508 or http://dx.doi.org/10.2139/ssrn.895508

Matteo Bugamelli (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Francesco Paternò

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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