Can Mobile Money-Induced Cost Reduction Spur More Remittances to Uganda? Would the Resultant Large Remittances Affect Monetary Policy Effectiveness?

Jimmy Apaa Okello

Working Papers from African Economic Research Consortium

Abstract: The increased use of mobile money for cross-border transfers can lower the costs of cross-border remittances. The reduction in costs in turn can spur additional increases in remittances as it frees up the incomes of the senders. This study first estimated the remittance elasticity to cost by applying the pooled mean group method to quarterly panel data of three country sources of remittances to Uganda for the period 2013Q1- 2022Q4. The results showed that remittances are highly elastic to costs. This implies that a reduction in costs can spur larger remittances than is currently observed. The study then created two regimes (one with lower and another with higher growth of remittances) in which we assess the impact of remittances on monetary policy effectiveness. We use the local projection model on quarterly data for the period 2002Q3-2023Q1. The results showed that the responses of output gap, inflation, and policy rates to shock in monetary policy are broadly similar in magnitude and direction across both regimes. However, the policy rate and inflation responded sluggishly in the regime with higher growth of remittances, which suggests that in this regime, monetary policy is not as potent as it would be in the regime with lower remittance growth. Thus, in a regime with higher remittance growth, the case for an independent monetary policy is weakened. Thus, in this regime, for a central bank to credibly commit to an inflation target, it must adopt a fixed exchange rate system (or variants therein).

Date: 2024-07-17
Note: African Economic Research Consortium
References: Add references at CitEc
Citations:

Downloads: (external link)
https://publication.aercafricalibrary.org/handle/123456789/3854 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aer:wpaper:03497339-fe62-48ef-b7a2-252d7a9b49fe

Access Statistics for this paper

More papers in Working Papers from African Economic Research Consortium Contact information at EDIRC.
Bibliographic data for series maintained by Daniel Njiru ().