Remittances and the Dutch Disease
FRB of Atlanta Working Paper No. 2007-8a
38 Pages Posted: 13 May 2007 Last revised: 6 Jul 2014
Date Written: August 2009
Abstract
Using data for El Salvador and Bayesian techniques, we develop and estimate a two-sector dynamic stochastic general equilibrium model to analyze the effects of remittances in emerging market economies. We focus our study on whether rising levels of remittances result in the Dutch disease phenomenon in recipient economies. We find that, whether altruistically motivated or otherwise, an increase in remittances flows leads to a decline in labor supply and an increase in consumption demand that is biased toward nontradables. The increase in demand for nontradables, coupled with higher production costs, results in an increase in the relative price of nontradables, which further causes the real exchange rate to appreciate. The higher nontradable prices serve as an incentive for an expansion of that sector, culminating in reallocation of labor away from the tradable sector. This resource reallocation effect eventually causes a contraction of the tradable sector. A vector autoregression analysis provides results that are consistent with the dynamics of the model.
Keywords: Dutch disease, real exchange rate, remittances
JEL Classification: F40, F41, O10
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Are Immigrant Remittance Flows a Source of Capital for Development?
By Ralph Chami, Connel Fullenkamp, ...
-
The Optimal Migration Duration and Activity Choice after Re-Migration