A Small Open Economy DSGE Model with Workers’ Remittances

Muhammad Rehman (), Sajawal Khan () and Zafar Hayat
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Muhammad Rehman: State Bank of Pakistan
Zafar Hayat: State Bank of Pakistan

No 84, SBP Working Paper Series from State Bank of Pakistan, Research Department

Abstract: In this paper, we develop and estimate a small open economy Dynamic Stochastic General Equilibrium (DSGE) model with an enriched specification, which enables us to include a variable of high significance for Pakistan viz. workers’ remittances. The results indicate that a positive shock to workers’ remittances help boost real growth via increased consumption and imported investment and helps ease-off the pressure on current account balance and thereby exchange rate. Too much dependence on workers’ remittances to help meet the trade deficits may potentially leave the economy in doldrums in case sizable negative shocks occur to the flow of foreign remittances. Therefore there is a need for structural reforms to help the economy out of the historical trade deficits, and decrease dependence on the workers’ remittances source to allow for a sustainable economic growth.

Keywords: Business cycles; Workers remittances; Open economy (search for similar items in EconPapers)
JEL-codes: E32 F24 F43 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2017-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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