Exchange Rate Flexibility and the Effect of Remittances on Economic Growth

Abstract

This paper studies the question of whether exchange rate policy affects the impact of remittances on economic growth in recipient countries. The paper utilizes a comprehensive data set that comprises annual observations for 135 developing and transition countries, spanning 1970-2007. The data for exchange rate regimes is based on the Reinhart and Rogoff exchange rate regime classification, whereas the data for remittances and all other variables are from the World Bank's World Development Indicators database. The findings indicate that more flexible exchange rate regimes are associated with a greater increase in economic growth following an increase in remittances, but also that the impact of remittances on growth is positive under a fixed exchange rate regime. The estimates suggest that a 1 percent increase in remittances increases per capita growth by about 0.79 percent under a fixed exchange rate regime, and that this effect increases by about 0.13 percent for a 1 point increase in the exchange rate flexibility index. The results further suggest that the effect of remittances under a fixed exchange rate regime is positive in less financially developed countries as well, but do not provide conclusive evidence that this effect varies inversely with exchange rate flexibility in such economies as theorized.