The Macroeconomic Consequences of Remittances

Abstract

This paper examines two important channels which influence the dynamic absorption of remittances at the macroeconomic level: (i) the presence of borrowing constraints, and (ii) the distribution of remittances across recipient households. Using an open economy DSGE model with heterogeneous households, we show that remittances accruing to hand-to-mouth households generate a dynamic response that is inherently contractionary for the recipient economy. On the other hand, credit-constrained households with ownership of capital respond in a way that is inherently expansionary. The ability of countercyclical remittances to smooth business cycle shocks also depends critically on their distribution across households. Calibrating the model to Philippines using both aggregate data as well as micro-evidence from the Family Income and Expenditure Survey (FIES), we show that the presence of binding credit constraints and the internal distribution of remittances play an important role in improving the model's fit to the data. The welfare consequences of the distribution of remittances are also analyzed.

Keywords: Remittances, credit constraints, labor supply, output investment, consumption, welfare

JEL Classification: F24, F41, O11