Remittances, Inflation and Exchange Rate Regimes in Small Open Economies

Christopher Ball (), Martha Cruz-Zuniga, Claude Lopez and Javier Reyes

University of Cincinnati, Economics Working Papers Series from University of Cincinnati, Department of Economics

Abstract: Remittances are private monetary transfers yet the rapidly growing literature on the subject seems to forget their monetary nature and thus ignore the role that exchange rate regimes play in determining the effect remittances have on a recipient economy. This paper uses a theoretical model and panel vector autoregression techniques to explore the role exchange rate regimes play in understanding the effect of remittances. The analysis considers yearly and quarterly data for seven Latin American countries. Our theoretical model predicts that remittances should be inflationary and generate an increase in the domestic money supply under a fixed regime but deflationary and generate no change in the money supply under a flexible regime. These differences are borne out in the data. This adds to our understanding of the true effect of remittances on economies and suggests results existent in the literature that do not control for regimes may be biased.

Date: 2008
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mig, nep-mon and nep-opm
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Related works:
Journal Article: Remittances, Inflation and Exchange Rate Regimes in Small Open Economies (2013)
Working Paper: Remittances, Inflation and Exchange Rate Regimes in Small Open Economies (2010)
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