Remittances and the Business Cycle: A Reliable Relationship?

Abstract

The cyclical behaviour of remittances with respect to the receiving-country economy has important implications for economic and financial policies. Counter-cyclical remittance flows could form part of broader stabilisation policies in economic downturns and could also encourage receiving countries to adopt fixed (or less flexible) exchange-rate regimes. On the other hand, pro-cyclical flows may create an amplification effect of upturns or downturns in the receiving economy. There is an extant literature dedicated to exploring the cyclical nature of remittances. In general, the results tend to be country-specific and show that, for some migration and remittance corridors, remittances are counter-cyclical while, for others, they are pro-cyclical. This paper argues that the cyclical nature of remittances must be evaluated in a dynamic framework and that the relationship (between remittances and the receiving economy) is unlikely to be stable over time. Using data from Mexico, we show that remittances are counter-cyclical during some periods, but pro-cyclical at others. The changing cyclical nature of remittances questions the potential of remittances to smooth out cyclical fluctuations in output.