Remittances and trade balance: A new transfer problem

Abstract

Remittances are an important inflow of funds in many developing economies. These remittances relate to the classic 'transfer problem' and hence likely affect the exchange rate. In this paper, I find that remittances have a significant negative impact on trade balances and that the driving force is the exchange rate. Additionally, I find that remittance has a positive impact on trade openness, and hence decrease in the trade balance is because the growth rate of imports is higher than the growth rate of exports.