Remittances, Trade Deficit, and Output Dynamics in Nepal

Bongers, Anelí, Fabio Canova, Kul Luintel and Torres, José Luis

No 21204, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We examine the macroeconomic implications of remittances in Nepal, a low-income country with a high remittance to GDP ratio and a significant trade deficit. Using a small open economy model with urban and rural households, segmented labor, incomplete financial markets, and subsistence consumption, we study exogenous and endogenous remittance variations, and remittance shocks affecting productivity. We analyze a policy forcing a share of remittance to go to capital investment. Remittances finance a trade deficit while maintaining a balanced current account. They increase income and consumption, but not necessarily domestic production. Policy implications are discussed.

JEL-codes: E32 F22 F24 F41 (search for similar items in EconPapers)
Date: 2026-02
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