Diego E. Vacaflores

Remittances, Monetary Policy, and Partial Sterilization

Remittances play a large and important role in certain economies, where they became a significant share of GDP. Official government records of these flows have been systematically improved since governments realized their importance, but a significant percentage of remittances remain unrecorded. This, together with the shadow economy, may pose a problem for monetary policy. This article uses a limited participation model to examine the differential effect that higher shares of remittances can have on monetary policy and describes the impact of remittances on a small open economy under partial sterilization. It demonstrates how a typical monetary shock will lead to a more pronounced liquidity effect when remittances become a higher proportion of GDP. It also shows that a positive remittance shock improves consumption and lowers interest rates, but as it also reduces work effort it momentarily lowers output. Such dynamics are exacerbated as the degree of partial sterilization is accentuated.

The Macroeconomic Consequences of Remittances

This study examines the impact of a remittances shock on the main macroeconomic aggregates of a small open economy. It uses a stochastic limited participation model to generate dynamics that are consistent with the empirical literature, like the increase in inflation, consumption, and leisure. However, the remittances shock generates a prolonged decline in GDP, which only diminishes when remittances are a larger percentage of GDP, the fraction of remittances directed towards investment increases, or when the fraction of labor income that remittances represent is reduced and is overturned when the persistence of the remittances shocks is shortened.

Expectations and the Dynamic Feedback between Foreign Direct Investment and Economic Growth

Abstract This paper seeks to analyze the dynamic feedback between Foreign Direct Investment (FDI) and economic growth – larger FDI promotes higher GDP, while higher GDP can be achieved with higher levels of FDI. We use panels and a sample of 19 Latin American countries to estimate a dynamic FDI and a dynamic GDP equation that jointly characterize the evolution of both variables. We find that the dynamics of GDP and FDI are mostly driven by the expectations. Shocks of GDP or FDI were found to play no role affecting the dynamics.

Beyond Altruism and Self-interest: The Growing Importance of External Factors in the Determination of Remittances Flowing to Latin America

ABSTRACT Remittances have become an important and reliable source of funds for many developing countries, affecting the well-being of its population and the performance of their economies. However, challenging conditions in the economies were migrant workers reside has unveiled the increasing importance of external factors in determining their ability to send money back home. This study relies on migration patterns to create migration and distance-weighted measures of external condition, and uses the Arellano and Bond dynamic panel methodology to gauge the relevance of these external macroeconomic conditions during the 1995–2015 period for a set of 18 Latin American countries. The results indicate that external conditions, irrespective of the way in which they are measured, have a positive and statistically significant effect on the amount of remittances flowing into the region, and that such effect go beyond differences in levels, as relative differences prove to be important as well. While the results also show that remittances are inversely related to the income level of receiving countries and that these flows respond positively to better economic performance and higher interest rates in the receiving country, such altruistic and self-interest factors are less consistent than the one found for foreign economic activity.

Does FDI Really Affect Employment In Host Countries?: Subsidiary Level Evidence

Despite significant flows of Foreign Direct Investment (FDI) and the perceived benefits (i.e. in terms of economic growth and innovation of productive techniques) that this type of flows can have on the receiving economies, very little has been learned about its potential contribution to employment generation in the host countries. The difficulty in measuring the impact of FDI on employment generation stems from the fact that these flows that tend to generate higher levels of economic activity and employment can potentially also lead to employment losses that may occur from increased competition, technological improvements that make production relatively more capital intensive, or from the use of different business practices. We examine the relevance of FDI in generating employment in host countries by estimating the impact on changes in subsidiary employment caused by changes—in the level of foreign investment in such subsidiary. Using Javorcik and Sparteneau (2005) approach, we measure FDI as the change in a subsidiarys assets controlled by a given MNC from another country. We use annual data derived from the OSIRIS database to create a sample of 5,641 subsidiaries operating in 66 host countries during the 2006-2008 time period and estimate a simple labor market specification using pooled OLS regression techniques with robust standard errors to correct for cluster sampling. Our results indicate that the heralded positive impact that FDI should have on employment at the subsidiary level is not a typical occurrence, but it does exist under specific circumstances. We show that the FDI has a positive effect on subsidiary employment in host countries located in the Americas, and when FDI originates from Asian-based MNCs. We also find a positive effect on subsidiary employment for FDI in the manufacturing and mining sectors, when FDI comes from a MNC headquartered in a low- and middle-income country, and when the subsidiaries operate in low- and middle-income countries. Furthermore, the analysis shows that FDI has a positive impact on subsidiary employment generation for companies that reduce their disinvestment, and for subsidiaries operating in countries where the country-level FDI as a share of GDP is smaller. These findings suggest that countries and policymakers should take these factors into consideration when formulating policies to enhance employment opportunities in their countries through higher levels of FDI, but it is not realistic for countries with different characteristics to expect the same effect on employment from foreign investment.