Economic models highlight that migrant remittances contribute to the “Dutch disease” by appreciating the real exchange rate and reducing export competitiveness. However, empirical evidence demonstrates cases where remittance inflows are associated with exchange rate depreciation. In this study, we develop an economic model showing how remittances can lead to real exchange rate depreciation and promote economic growth when managed through monetary and fiscal policy.
We design a short-term Keynesian macroeconomic model incorporating the international bond market and remittances. We demonstrate that remittances may generate real exchange rate depreciation and boost exports through an enhanced international credit flow channel. We also examine the implications of government borrowing, monetary sterilization, and foreign direct investment (FDI) within this framework to understand their influence on remittance flow macroeconomic dynamics.
Our model presents four cases that shed light on how our hypothesized remittance-induced credit channel can impact economic growth in an emerging economy under a large value of (a) the international portfolio investment coefficient, f, (b) a small value of f, (c) a complete sterilization in the monetary sector, and (d) a partial sterilization in the monetary sector. We show that government borrowing and FDI are critical in moderating remittance effects on domestic interest and exchange rates. The findings highlight how central bank and government policy responses influence the extent to which remittances impact economic growth.
We present a new theoretical explanation for how remittances can lead to real exchange rate depreciation through the monetary and financial sectors. By incorporating government financing decisions and FDI, we clarify the macroeconomic effects of remittances for theory. The findings from the four cases have important policy implications, especially for open emerging economies that rely on remittances and seek to mitigate the risks of the Dutch disease while using remittances to promote economic growth.
