Workers' Remittances and the Equilibrium Real Exchange Rate: Theory and Evidence

Abstract

This paper investigates the impact of workers’ remittances on equilibrium real exchange rates (ERER) in recipient economies. Using a small open economy model, it shows that standard “Dutch Disease” results of appreciation are substantially weakened or even overturned depending on: degree of openness, factor mobility between domestic sectors, and countercyclicality of remittances; the share of consumption in tradables; and the sensitivity of a country’s risk premium to remittance flows. Panel integration techniques on a large set of countries provide support for these analytical results, and show that ERER appreciation in response to sustained remittance flows tends to be quantitatively small.Remittances, Real Exchange Rate, Dutch Disease