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Converting remittances to investment: a dynamic optimal policy

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  • Nasreen Nawaz

    (Michigan State University)

Abstract

The existing literature does not provide a theoretical framework for conversion of remittances into investment. If a government introduces some measure for the earner abroad to save more, the earner’s cost (to the extent of his/ her share of savings in the home country) jumps to the pre-policy cost minus the additional costs causing inefficiency prior to the remittance policy affecting the quantity of savings and hence pushing the market out of equilibrium. The supply and the demand of the savings, then adjust over time to bring the new post-policy market equilibrium. The interest rate adjustment mechanism is based on the fact that when the remittance-investment policy leads the market out of equilibrium, the buyers’ and sellers’ decisions are not coordinated at the current interest rate. It is essential to take into account the efficiency losses during the adjustment process while computing the benefits of remittance-investment policy. This paper develops a dynamic model and derives an optimal remittance-investment policy minimizing the efficiency losses (output and/ or consumption of funds lost) during the dynamic adjustment process taking into account the gains from the post-policy market equilibrium subject to a policy cost constraint.

Suggested Citation

  • Nasreen Nawaz, 2020. "Converting remittances to investment: a dynamic optimal policy," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(1), pages 140-160, January.
    • Handle: RePEc:spr:jecfin:v:44:y:2020:i:1:d:10.1007_s12197-019-09473-9
    DOI: 10.1007/s12197-019-09473-9
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    Cited by:

    1. Ahmed, Muhammad Ashfaq & Nawaz, Nasreen, 2023. "Policy Formulation for an Optimal Level of Savings in a Dynamic Setting," MPRA Paper 121352, University Library of Munich, Germany, revised 29 Oct 2023.
    2. Ahmed, Muhammad Ashfaq & Nawaz, Nasreen, 2023. "Adam Smith's Perfectly Competitive Market is Not Pareto Efficient: A Dynamic Perspective," MPRA Paper 118362, University Library of Munich, Germany.

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    More about this item

    Keywords

    Remittance-investment policy; Dynamic efficiency; Interest adjustment path;
    All these keywords.

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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