Beware of Emigrants Bearing Gifts: Optimal Fiscal and Monetary Policy in the Presence of Remittances

51 Pages Posted: 26 Apr 2006

See all articles by Ralph Chami

Ralph Chami

International Monetary Fund (IMF)

Thomas F. Cosimano

University of Notre Dame; International Monetary Fund

Michael Gapen

International Monetary Fund (IMF) - International Capital Markets Department

Date Written: March 2006

Abstract

This paper uses a stochastic dynamic general equilibrium model to investigate the influence of countercyclical remittances on the conduct of fiscal and monetary policy and trace their effects on real and nominal variables in a business cycle setting. We show that remittances raise disposable income and consumption, and insure against income shocks, thereby raising household welfare. However, remittances increase the correlation between labor and output, thereby producing a more volatile business cycle and increasing output and labor market risk. Optimal monetary policy in the presence of remittances deviates from the Friedman rule, highlighting the need for independent government policy instruments.

Keywords: Remittances, Ramsey policies, optimal monetary policy, optimal taxation

JEL Classification: F2, E44, E63

Suggested Citation

Chami, Ralph and Cosimano, Thomas F. and Gapen, Michael, Beware of Emigrants Bearing Gifts: Optimal Fiscal and Monetary Policy in the Presence of Remittances (March 2006). IMF Working Paper, Vol. , pp. 1-51, 2006. Available at SSRN: https://ssrn.com/abstract=898722

Ralph Chami (Contact Author)

International Monetary Fund (IMF) ( email )

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

Thomas F. Cosimano

University of Notre Dame ( email )

513 W. Broad #704
Falls Church, VA 22046
United States
574-807-4876 (Phone)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
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Michael Gapen

International Monetary Fund (IMF) - International Capital Markets Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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