Remittances, real exchange rate and the Dutch disease in Asian developing countries

Abstract

A huge amount of remittances as a source of capital flows can lead to the overshooting of a country’s real exchange rate and hurt its competitiveness, a phenomenon known as the Dutch disease. This problem concerns many recipient countries, especially the Asian developing ones as they have obtained a quite high value of remittances. In addition to this fact, in our perception, there have been no research to look into this impact for this group of countries. Therefore, the purpose of the paper is to investigate whether Asian developing countries have been facing Dutch disease or not. We thus apply System Generalized Methods of Moment (S-GMM) for the linear dynamic panel data (DPD) model from 32 countries during the period from 2006 to 2016 to examine the relationship between remittances and real effective exchange rate. Our finding indicates that as remittances per capita increase by 1%, the real effective exchange rate (REER) of these countries appreciates by 0.103% which undermines these countries’ competitiveness, supporting the existence of Dutch disease. Interestingly, we also discover that the Dutch disease only appears in countries with low ratio of remittances of GDP (less than or equal to 1%). Meanwhile, for countries having higher ratio, remittances result in REER depreciation. Moreover, as types of exchange rate regime of countries are considered, the finding supports the idea of Combes, Kinda, and Plane (2011) that floating exchange rate results in the dampening appreciation of the real exchange rate caused by capital flows. Besides, only for the countries with low levels of export (at the group of q25), Dutch disease appears due to the remittance inflows.