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Macroeconomic impacts of remittances: A two-country, two-sector model

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  • Lim, Sokchea
  • Khun, Channary

Abstract

We examine the impacts of remittances on foreign direct investment and the development of developing countries using a macro-dynamic model of two small open economies—an advanced economy and a developing country. We incorporate a two-sector framework for the latter: traditional non-traded and foreign capital dependent traded sectors while introducing a collateral effect of remittances. The most important feature of the model is that remittances come from two sources: temporary migrant workers and permanent immigrants, and they are allocated between consumption and domestic investment through the household’s utility maximization. The results from extensive calibration exercises show that remittances in the presence of labor migration hurt the traded sector of the developing economy, leading to a contraction in the aggregate output. Albeit to a lesser extent, the contraction persists even with the expansionary impacts of remittances through the collateral effect. In addition, the migration policy of the developing countries can weaken other development efforts, giving rise to a phenomenon known as a migration-remittance trap.

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  • Lim, Sokchea & Khun, Channary, 2022. "Macroeconomic impacts of remittances: A two-country, two-sector model," Journal of Macroeconomics, Elsevier, vol. 73(C).
    • Handle: RePEc:eee:jmacro:v:73:y:2022:i:c:s0164070422000404
    DOI: 10.1016/j.jmacro.2022.103443
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    References listed on IDEAS

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    1. Miguel D. Ramirez & Hari Sharma, 2009. "Remittances and Growth in Latin America: A Panel Unit Root and Panel Cointegration Analysis," Estudios Economicos de Desarrollo Internacional, Euro-American Association of Economic Development, vol. 9(1).
    2. Kim, Namsuk, 2007. "The impact of remittances on labor supply : the case of Jamaica," Policy Research Working Paper Series 4120, The World Bank.
    3. Mrs. Poonam Gupta, 2005. "Macroeconomic Determinants of Remittances: Evidence from India," IMF Working Papers 2005/224, International Monetary Fund.
    4. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-142, March.
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    1. Lim, Sokchea & Khun, Channary, 2023. "Migrant network effect and economic development," Economics Letters, Elsevier, vol. 225(C).

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    More about this item

    Keywords

    Cross-border labor migration; Remittances; Foreign direct investment; Economic development; Migration-remittance trap;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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