Remittance Inflows and State-Dependent Monetary Policy Transmission in Developing Countries

Immaculate Machasio () and Peter Tillmann
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Immaculate Machasio: Justus-Liebig-University Giessen, Germany

No GRU_2017_004, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: Remittance inflows from overseas workers are an important source of for- eign funding for developing and emerging economies. The literature is in- conclusive about the cyclical nature of remittance inflows. To the extent remittances are procyclical they pose a challenge to monetary policy: a tight- ening 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 remit- tance inflows. This paper estimates a series of nonlinear (smooth-transition) local projections to study the effectiveness of monetary policy under differ- ent remittance inflows 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 inflows of remittances. These results have important implications for the design of inflation targeting in developing countries.

Keywords: Remittance inflows; monetary policy; inflation targeting; smooth- transition model; local projections (search for similar items in EconPapers)
JEL-codes: E32 E52 O16 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2017-03-27
New Economics Papers: this item is included in nep-mac, nep-mon and nep-sea
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Related works:
Working Paper: Remittance Infl ows and State-Dependent Monetary Policy Transmission in Developing Countries (2016)
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