Can Financial Development Mitigate the Impact of Remittances on Real Exchange Rate Appreciation?
Keywords:migrants, social networks, complementary schools, relationships
AbstractRemittances have been blamed for causing real exchange rate appreciation by raising the relative prices of nontraded goods and services in the recipient countries. However, empirical studies seeking to support this claim are lacking in Asia, despite the huge amount of remittances received by the region. In view of that, this paper used a panel dataset from eighteen remittance-recipient Asian countries during the period of 1981 – 2010 and Pooled Mean Group (PMG) estimator to examine the effect of remittances and financial sector development on real exchange rate. The paper, specifically, questions if the real exchange rate appreciation caused by the inflow of remittances varies with the degree of financial sector development in these countries. The paper finds that inflow of remittances has significant long-run impact on the appreciation of the real exchange rates in the remittance-recipient Asian countries. However, such effect of appreciation declines in countries with enhanced financial sector development.
Acosta, P. A., Lartey, E. K., & Mandelman, F. S. (2009a). Remittances and the Dutch disease. Journal of international economics, 79(1), 102-116.
Acosta, P. A., Baerg, N. R., & Mandelman, F. S. (2009b). Financial development, remittances, and real exchange rate appreciation. Economic Review, 1-12.
Aggarwal, R., Demirgüç-Kunt, A., & Pería, M. S. M. (2011). Do remittances promote financial development? Journal of Development Economics, 96(2), 255-264.
Amuedo-Dorantes, C., & Pozo, S. (2004). Workers' remittances and the real exchange rate: a paradox of gifts. World development, 32(8), 1407-1417.
Ball, C. P., Lopez, C., & Reyes, J. (2012). Remittances, Inflation and Exchange Rate Regimes in Small Open Economies. The World Economy.
Baltagi, B. H., Demetriades, P. O., & Law, S. H. (2009). Financial development and openness: Evidence from panel data. Journal of development economics, 89(2), 285-296.
Bassanini, A., & Scarpetta, S. (2002). Does human capital matter for growth in OECD countries? A pooled mean-group approach. Economics letters, 74(3), 399-405.
Bakardzhieva, D., Ben Naceur, S., & Kamar, B. (2010). The impact of capital and foreign exchange flows on the competitiveness of developing countries. IMF Working Papers, 1-30.
Balassa, B. (1964). The purchasing-power parity doctrine: a reappraisal. The Journal of Political Economy, 72(6), 584-596.
Barajas, A. & Chami, R. & Hakura, D. & Montiel, P.(2011). Workers' Remittances and the Equilibrium Real Exchange Rate: Theory and Evidence. Economía 11(2), 45-94. Brookings Institution Press. Retrieved January 2, 2013, from Project MUSE database.
Bayangos, V., & Jansen, K. (2011). Remittances and competitiveness: the case of the Philippines. World Development, 39(10), 1834-1846.
Bettin, G., & Zazzaro, A. (2012). Remittances and Financial Development: Substitutes or Complements in Economic Growth? Bulletin of Economic Research, 64(4), 509-536.
Blackburne, E. F., & Frank, M. W. (2007). Estimation of nonstationary heterogeneous panels. Stata Journal, 7(2), 197.
Bourdet, Y., & Falck, H. (2006). Emigrants' remittances and Dutch disease in Cape Verde. International Economic Journal, 20(3), 267-284.
Brown, R. P., & Carmignani, F. (2015). Revisiting the effects of remittances on bank credit: a macro perspective. Scottish Journal of Political Economy, 62(5), 454-485.
Chowdhury, M. B., & Rabbi, F. (2013). Workers' remittances and Dutch Disease in Bangladesh. The Journal of International Trade & Economic Development, (ahead-of-print), 1-21.
Canuto, O., & Ratha, D. (2011). Migration and Remittances. Factbook 2011. Washington DC: World Bank Publication.
Combes, J. L., Kinda, T., & Plane, P. (2012). Capital flows, exchange rate flexibility, and the real exchange rate. Journal of Macroeconomics, 34(4), 1034-1043.
Darvas, Z. (2012). Real effective exchange rates for 178 countries: A new database (No. 2012/06). Bruegel Working Paper.
Daway‐Ducanes, S. L. S. (2019). Remittances, Dutch disease, and manufacturing growth in developing economies. Scottish Journal of Political Economy, 66(3), 360-383.
Edwards, S. (1989). Real exchange rates, devaluation, and adjustment: exchange rate policy in developing countries. Cambridge, MA: MIT press.
Ersoy, I. (2013). The Role of Private Capital Inflows and the Exchange Market Pressure on Real Exchange Rate Appreciation: The Case of Turkey. South African Journal of Economics, 81(1), 35-51.
Freund, C., & Spatafora, N. (2008). Remittances, transaction costs, and informality. Journal of Development Economics, 86(2), 356-366.
Fuentes, J. C. C., & Herrera, J. C. C. (2007). Emigrant Remittances and the Real Exchange Rate in Guatemala: An Adjustment & Costs Story! Bank of Guatemala.
Gente, K., & León-Ledesma, M. A. (2006). Does the world real interest rate affect the real exchange rate? The South East Asian experience. J. Int. Trade & Economic Development, 15(4), 441-467.
Gheeraert, L., Sukadi Mata, R., & Traca, D. (2010). Remittances and domestic investment in developing countries: an analysis of the role of financial sector development. Working papers CEB, 10.
Hassan G.M., & Holmes M.J. (2013) Remittances and the real effective exchange rate. Applied Economics, 45(35), 4959 - 4970.
Hsueh, S. J., Hu, Y. H., & Tu, C. H. (2013). Economic growth and financial development in Asian countries: A bootstrap panel Granger causality analysis.Economic Modelling, 32, 294-301.
Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of econometrics, 115(1), 53-74.
Izquierdo, A., & Montiel, P. J. (2006). Remittances and equilibrium real exchange rates in six Central American Countries. Inter-American Development Bank, mimeo.Jones, L. E., &
Jayaraman, T. K., Lau, L. S., & Ng, C. F. (2018). Role of Financial Sector Development as a Contingent Factor in the Remittances and Growth Nexus: A Panel Study of Pacific Island Countries. Remittances Review, 3(1), 51-74.
Kim, J. (2019). The Impact of Remittances on Exchange Rate and Money Supply: Does "Openness" Matter in Developing Countries?. Emerging Markets Finance and Trade, 1-26.
Lartey, E. K., Mandelman, F. S., & Acosta, P. A. (2012). Remittances, exchange rate regimes and the Dutch disease: A panel data analysis. Review of International Economics, 20(2), 377-395.
Levine, R. (2005). Finance and growth: theory and evidence. Handbook of economic growth, 1, 865-934.
Lopez, H., Molina Sánchez, L., & Bussolo, M. (2007). Remittances and the real exchange rate (No. 4213). The World Bank.
Lynch, D. (1996). Measuring financial sector development: a study of selected asia‐pacific countries. The Developing Economies, 34(1), 1-27.
Manuelli, R. E. (1995). Growth and the effects of inflation. Journal of Economic Dynamics and Control, 19(8), 1405-1428.
Martins, P. M. (2013). Do large capital inflows hinder competitiveness? The Dutch disease in Ethiopia. Applied Economics, 45(8), 1075-1088.
Martı́nez-Zarzoso, I., & Bengochea-Morancho, A. (2004). Pooled mean group estimation of an environmental Kuznets curve for CO 2. Economics Letters,82(1), 121-126.
McCormick, B., & Wahba, J. (2000). Overseas employment and remittances to a dual economy. The Economic Journal, 110(463), 509-534.
Mongardini, J., & Rayner, B. (2009). Grants, remittances, and the equilibrium real exchange rate in Sub-Saharan African countries. IMF Working Papers, 1-27.
Mundaca, B. G. (2009). Remittances, financial market development, and economic growth: the case of Latin America and the Caribbean. Review of Development Economics, 13(2), 288-303.
Ngoma, A. L., Ismail, N. W., & Law, S. H. (2018). Domestic Macroeconomic Conditions and Inflow of Workers'remittances in Labour-Sending Asian Countries. International Journal of Business and Society, 19(1), 41-58.
Obstfeld, M., Rogoff, K. S., & Wren-lewis, S. (1996). Foundations of international macroeconomics (Vol. 30). Cambridge, MA: MIT press.
Ojapinwa, T. V., & Nwokoma, N. I. (2018). Workers' Remittances and the Dutch‐Disease Argument: Investigating the Relationship in Sub‐Saharan Africa. African Development Review, 30(3), 316-324.
Olaniyan, T. O. (2019). Interactive Effects of Remittances and Financial Sector Development on Economic Growth in Nigeria. Remittances Review, 4(1), 19-39.
Pesaran, M. H., Shin, Y., & Smith, R. P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94(446), 621-634.
Pesaran, M. H., & Smith, R. (1995). Estimating long-run relationships from dynamic heterogeneous panels. Journal of econometrics, 68(1), 79-113.
Quibria, M. G. (1997). International migration, remittances and income distribution in the source country: a synthesis. Bulletin of Economic Researchs, 49(1), 29-46.
Rajan, R. G., & Subramanian, A. (2005). What undermines aid's impact on growth? (No. w11657). National Bureau of Economic Research.
Ramirez, M. D., & Sharma, H. (2009). Remittances and Growth in Latin America: A Panel Unit Root and Panel Cointegration Analysis. Estudios Economicos de Desarrollo Internacional, 9(1).
Saadi-Sadik, T. and Petri, M. (2006). To smooth or not to smooth - the impact of grant and remittances on the equilibrium exchange rate in Jordan. IMF Working Paper 06/257 International Monetary Fund, Washington DC.
Samuelson, P. A. (1964). Theoretical notes on trade problems. The Review of Economics and Statistics, 46(2), 145-154.
Ostry, J. D. (1988). The balance of trade, terms of trade, and real exchange rate: an intertemporal optimizing framework. Staff Papers-International Monetary Fund, 541-573.