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Beware of Emigrants Bearing Gifts; Optimal Fiscal and Monetary Policy in the Presence of Remittances

Michael T. Gapen, Thomas Cosimano () and Ralph Chami ()

No 06/61, IMF Working Papers from International Monetary Fund

Abstract: This paper uses a stochastic dynamic general equilibrium model to investigate the influence of countercyclical remittances on the conduct of fiscal and monetary policy and trace their effects on real and nominal variables in a business cycle setting. We show that remittances raise disposable income and consumption, and insure against income shocks, thereby raising household welfare. However, remittances increase the correlation between labor and output, thereby producing a more volatile business cycle and increasing output and labor market risk. Optimal monetary policy in the presence of remittances deviates from the Friedman rule, highlighting the need for independent government policy instruments.

Keywords: Economic models; Optimal taxation; Remittances; Monetary policy; Fiscal policy; Transfers of foreigners income; Workers remittances; Ramsey policies, optimal monetary policy, remittance, money growth, inflation, Financial Markets and the Macroeconomy, International Factor Movements And International Business, (search for similar items in EconPapers)
Pages: 51
Date: 2006-03-01
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pbe
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