Do received remittances cause Dutch disease in developed and developing countries?

Abstract

PurposeThe present study aimed to examine the effect of received remittance inflows on the price level ratio of the purchasing power parity conversion factor to the market exchange rate in 36 developed and developing countries from 2004 to 2020.Design/methodology/approachThe panel data conducted a comparative analysis and used panel least squares, regression with Driscoll-Kraay standard errors of fixed effect, random effect, feasible generalised least squares and maximum likelihood robust least squares to overcome the heterogeneity issue. Furthermore, the two-step difference generalised method of moments to overcome the endogeneity issue. Diagnostic tests were used to increase robustness.FindingsIn the studied countries, there was a statistically significant negative relationship between received remittance inflows and the price-level ratio of the purchasing power parity conversion factor to the market exchange rate. This relationship explains why remittance flows depreciate the real exchange rate. The study’s results also indicated that attracting investments can improve the quality of institutions despite high tax rates, leading to low tax revenue.Originality/valueThe current study findings enrich the understanding of policies of how governments should minimise tariff rates on capital imports and introduce export-oriented incentive programmes. The study also revealed that Dutch disease can occur due to differences in the demand structure and manufacturing development policy.