Workers' Remittances and the Equilibrium Real Exchange Rate: Theory and Evidence

This paper investigates the impact of workers’ remittances on equilibrium real exchange rates (ERER) in recipient economies. Using a small open economy model, it shows that standard “Dutch Disease” results of appreciation are substantially weakened or even overturned depending on: degree of openness, factor mobility between domestic sectors, and countercyclicality of remittances; the share of consumption in tradables; and the sensitivity of a country’s risk premium to remittance flows. Panel integration techniques on a large set of countries provide support for these analytical results, and show that ERER appreciation in response to sustained remittance flows tends to be quantitatively small.