Abstract
AbstractThis paper studies the question of whether exchange rate policy affects the impact of remittances on economic growth in recipient countries. 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 regime. The results further show 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; the results being sensitive to the choice of financial development indicator.
Highlights
There is an extensive literature on the linkage between exchange rate regimes and economic growth with no consensus on the nature of the relationship
In order to explore further, how exchange rate flexibility affects the relationship between remittances and economic growth, I specify and estimate a dynamic model using the generalized method of moments (GMM) estimator proposed by Arellano and Bond (1991) and Blundell and Bond (1998), which is designed to deal with potential endogeneity in all explanatory variables, but which accounts, for endogeneity due to the introduction of lags of the dependent variable as covariates
It has been argued that exchange rate regimes may have implications for the growth effect of remittances either directly through the impact they exert on resource reallocation and the real exchange rate or indirectly with respect to how they influence macroeconomic stability
Summary
There is an extensive literature on the linkage between exchange rate regimes and economic growth with no consensus on the nature of the relationship. An empirical assessment of the theoretical model using vector autoregression analysis indicates that these observations are generally consistent with the dynamics of inflation induced by a shock to remittances in El Salvador, which is representative of an economy that operates a fixed exchange regime, and the Philippines, which typifies an economy with an inflation targeting monetary regime. It may be argued that exchange rate regimes could facilitate or undermine economic growth directly, to the extent that they curtail or precipitate Dutch disease effects of remittances respectively, through their impact on resource reallocation which in turn has implications for economic growth.
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