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Workers' remittances and the equilibrium real exchange rate: theory and evidence

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  • Barajas, Adolfo
  • Montiel, Peter
  • Chami, Ralph
  • Hakura, Dalia

Abstract

"This paper investigates the impact of workers´ remittances on equilibrium real exchange rates (ERER) in recipient economies. Using a small open economy model, it shows that standard "Dutch Disease" results of appreciation are substantially weakened or even overturned depending on: degree of openness, factor mobility between domestic sectors, and countercyclicality of remittances; the share of consumption in tradables; and the sensitivity of a country´s risk premium to remittance flows. Panel cointegration techniques on a large set of countries provide support for these analytical results, and show that ERER appreciation in response to sustained remittance flows tends to be quantitatively small."
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Suggested Citation

  • Barajas, Adolfo & Montiel, Peter & Chami, Ralph & Hakura, Dalia, 2011. "Workers' remittances and the equilibrium real exchange rate: theory and evidence," LSE Research Online Documents on Economics 123048, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:123048
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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