Remittances, Output, and Exchange Rate Regimes: Theory with an Application to Latin America

Dennis Jansen and Diego E. Vacaflores

Southern Economic Journal, 2020, vol. 86, issue 3, 1170-1191

Abstract: Immigrant remittances have a broad effect on the receiving economies. We show this impact on the main macroeconomic aggregates is dependent on the policy arrangements in place that manage capital flows. We look at remittance inflows in a small open economy to examine their influence on output under alternative exchange rate regimes. Using a simple stochastic limited participation model, we are able to reproduce dynamics consistent with the empirical literature. We find that the dynamics of labor, inflation, and output are dependent on the parameterization of the utility function and on the monetary rule governing the evolution of the interest rate and in particular with respect to the response of interest rates to exchange rate movements. We find that the initial drop of output resulting from a remittances shock is similar under alternative exchange rate regimes, but the subsequent recovery of output is faster and stronger under more flexible exchange rate regimes. We provide suggestive empirical evidence from a panel Vector Autoregression specification for 17 Latin American countries that corroborates our results.

Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1002/soej.12399

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:wly:soecon:v:86:y:2020:i:3:p:1170-1191

Access Statistics for this article

More articles in Southern Economic Journal from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().