Analyzing the impact of workers’ remittances on household consumption in Latin American and Caribbean Countries

Increasing remittance flows to developing countries continue to stimulate analytical research. We apply a model, based on the “permanent income hypothesis”, to estimate the impact of remittances on consumption in eleven Latin American and Caribbean countries for the period of 2003–2013. The independent variables are: (a) real per capita national income (exclusive of remittances), the measure of “permanent income”, (b) remittances, the measure of “transitory income”, and (c) real interest rate, the indicator of intertemporal consumption substitution. The coefficient of remittances measures the consumption-augmentation and saving effects, while the correlation between remittances and per capita income indicates the consumption-smoothing effects. The results, based on the panel data methodology, indicate: (a) both permanent income and transitory income positively impact consumption, (b) consumption responds higher to permanent income than to transitory income, (c) transitory income has augmenting, stabilizing and countercyclical effects on consumption, and (d) the significant interest rate indicates the ability of recipients to make intertemporal consumption substitution. Evidence of significant “country effect” attests to heterogeneity among countries. Strategies to stabilize remittance flows and to leverage them for financial, economic and social development should be important policy considerations.