Remittances Inflows, Gain of Foreign Exchange or Trade Loss? New Evidence from Low, Lower-Middle and Middle-Income Groups

This study examines the relationship between remittances, exchange rate and export competitiveness for 58 countries from low, lower-middle and middle-income groups. In order to investigate this relationship, and building on our previous work found in Khurshid (2016), we applied the System Generalized Method of Moment Regression (SGMM) and bootstrapped panel Ganger causality approach using newly constructed remittances series for a period lasting from 1988 to 2014. The results unravel evidence that remittances appreciate the exchange rate and adversely affect competitiveness in lower-middle and middle-income countries whereas, the exchange rates negatively affect exports in the middle-income group. The consumption and spending effects remain dominating in causing the Dutch Disease in all groups. On the topic of remittances-exchange rate and remittances- export causal nexus, we find mixed results for the three income groups. There is not a clear consensus about the direction of the causal link, which means the findings are country- specific. The outcomes have significant policy implications for the groups in our analysis.