Output Growth Volatility and Remittances

Abstract

Output growth volatility has negative effects on growth, poverty and welfare. The empirical literature has therefore searched for country-specific factors affecting volatility and focused on financial development, policy distortions, trade and financial openness. Using the same empirical framework, we focus on migrants' remittances that can help to reduce output growth volatility thanks to their size, stability and low procyclicality. In a cross-section of about 60 emerging and developing economies over the period 1980–2003, we show that indeed remittances are negatively correlated to output growth volatility. Instrumental variable estimation suggests that the effect of remittances is of a causal nature.