Remittances and Macroeconomic Volatility in African Countries

Ahmat Jidoud

No 2015/049, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates the channels through which remittances affect macroeconomic volatility in African countries using a dynamic stochastic general equilibrium (DSGE) model augmented with financial frictions. Empirical results indicate that remittances—as a share of GDP—have a significant smoothing impact on output volatility but their impact on consumption volatility is somewhat small. Furthermore, remittances are found to absorb a substantial amount of GDP shocks in these countries. An investigation of the theoretical channels shows that the stabilization impact of remittances essentially hinges on two channels: (i) the size of the negative wealth effect on labor supply induced by remittances and, (ii) the strength of financial frictions and the ability of remittances to alleviate these frictions.

Keywords: WP; business cycle; risk premium; borrowing cost; interest rate; Macroeconomic Volatility; Remittances; African Economies; Financial Frictions; consumption volatility; countercyclical remittance; remittance flow; remittances channel; savings decision; effect of remittance; volatility decrease; consumption fluctuation; Consumption; Labor supply; Business cycles; Financial sector development; Africa (search for similar items in EconPapers)
Pages: 37
Date: 2015-03-02
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Citations: View citations in EconPapers (16)

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