Remittance Infl ows and State-Dependent Monetary Policy Transmission in Developing Countries

Remittance infl ows from overseas workers are an important source of foreign funding for developing and emerging economies. The literature is inconclusive about the cyclical nature of remittance infl ows. To the extent remittances are procyclical they pose a challenge to monetary policy: a tightening of policy will be less effective if at the same time remittances increase strongly. The same is true for a policy easing under exceptionally weak remittance in flows. This paper estimates a series of nonlinear (smooth-transition) local projections to study the effectiveness of monetary policy under different remittance in flows regimes. The model is able to provide state-dependent impulse response functions. We show that for Kenya, Mexico, Colombia and the Philippines monetary policy indeed has a smaller domestic effect under strong in flows of remittances. These results have important implications for the design of infl ation targeting in developing countries.