Beware of Emigrants Bearing Gifts: Optimal Fiscal and Monetary Policy in the Presence of Remittances

Michael Gapen, Thomas Cosimano and Ralph Chami

No 2006/061, IMF Working Papers from International Monetary Fund

Abstract: This paper uses a stochastic dynamic general equilibrium model to investigate the influence of countercyclical remittances on the conduct of fiscal and monetary policy and trace their effects on real and nominal variables in a business cycle setting. We show that remittances raise disposable income and consumption, and insure against income shocks, thereby raising household welfare. However, remittances increase the correlation between labor and output, thereby producing a more volatile business cycle and increasing output and labor market risk. Optimal monetary policy in the presence of remittances deviates from the Friedman rule, highlighting the need for independent government policy instruments.

Keywords: WP; government spending; money supply; business cycle; Remittances; Ramsey policies; optimal monetary policy; optimal taxation; price level; remittance flow; private income; presence of remittance; marginal product of labor; rate of inflation; equilibrium price; remittance behavior; countercyclical remittance; baseline economy; equilibrium remittance; utility function; Labor supply; Income; Labor taxes; Consumption; Caribbean (search for similar items in EconPapers)
Pages: 51
Date: 2006-03-01
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Citations: View citations in EconPapers (76)

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