Emmanuel K. K. Lartey

Remittances and the Dutch Disease

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.

Remittances, Exchange Rate Regimes, and the Dutch Disease: A Panel Data Analysis

Using disaggregated sectorial data, this study shows that rising levels of remittances have spending effects that lead to real exchange rate appreciation and resource movement effects that favor the nontradable sector at the expense of tradable goods production. These characteristics are two aspects of the phenomenon known as Dutch disease. The results further indicate that these effects operate more strongly under fixed nominal exchange rate regimes.

Capital Inflows, Dutch Disease Effects, and Monetary Policy in a Small Open Economy

This paper studies the role of monetary policy in a small open economy that experiences Dutch disease effects as a result of capital inflows, and examines the issue of whether such a policy should seek to address these effects from a welfare perspective. I find that Dutch disease effects occur under a fixed nominal exchange rate regime. However, a monetary policy regime characterized by generalized Taylor interest rate rules featuring either the real exchange rate or the nominal exchange rate avert Dutch disease effects. Welfare results reveal that the optimal rule is a generalized Taylor rule consistent with nominal exchange rate flexibility.

Capital inflows and the real exchange rate: An empirical study of sub-Saharan Africa

Abstract This paper investigates the question of whether capital inflows, particularly Foreign Direct Investment (FDI), cause the real exchange rate to appreciate. It also examines whether different forms of captial inflow have variable effects on the real exchange rate. The paper estimates an empirical real exchange rate model specifying a set of capital inflow variables using dynamic panel techniques. Based on data for a sample of sub-Saharan African countries for the period 1980 – 2000, the study reveals FDI as the category of private capital inflow that causes the real exchange rate to appreciate. The results also show that an increase in official aid causes a real appreciation, the magnitude being greater compared to that associated with FDI.

Remittances, investment and growth in sub-Saharan Africa

Several studies have examined the impact of remittances on economic growth, yet the results remain largely inconclusive. I present an analysis of the relationship between remittances and per capita growth, and investigate whether the impact of remittances on growth is through capital accumulation or other mechanisms. Using data for sub-Saharan African countries and dynamic empirical models, I find that there is a positive relationship between remittances and growth, as well as a positive interaction effect between remittances and financial depth on growth. The findings also reveal threshold values for two main indicators of financial development, above which the total effect of remittances on growth is positive. The results further provide evidence for the existence of an investment channel through which remittances affect growth, and indirect evidence that remittances contribute towards a stable macroeconomic environment, and hence, growth, through a consumption smoothing effect.

Financial Openness and the Dutch Disease

This paper studies the relationship between the degree of financial openness and Dutch disease effects of capital inflows in developing countries. The results reveal that an increase in financial openness leads to an appreciation of the real exchange rate. In particular, the study shows that an increase in inflow of foreign direct investments (FDI) results in an appreciation of the real exchange rate in more financially open countries only. The results also suggest that there is a trade‐off between the resource movement effect and the spending effect in more financially open economies following an increase in FDI inflows, such that the more the tradable sector expands relative to the nontradable sector, the greater is the real exchange rate appreciation.

A note on the effect of financial development on economic growth

A common result from the literature has been a positive monotonic effect of financial development on growth. This article presents an empirical investigation of the financial development–economic growth relationship by estimating a variant model to those in Levine et al. (2000) while allowing for the coefficient on the financial development index to vary by the level of financial development. Using dynamic panel techniques, coefficient estimates suggest that the exogenous component of financial development has a positive effect on economic growth and does not vary with the level of financial development.

Financial development, crises and growth

This article examines whether the effect of crises on growth varies across different levels of financial development. Using panel dataset and dynamic panel data estimation techniques, we find that financial crises have a strong negative effect on growth. More importantly, this impact varies with the level of financial development, such that countries with better developed financial systems are adversely affected by crises whereas such effects are minimal or nonexistent in economies with less developed systems. These results are robust across various model specifications.

Exchange rate flexibility and the effect of remittances on economic growth

This paper studies the question of whether exchange rate policy affects the impact of remittances on economic growth in recipient countries. The paper utilizes a comprehensive data set that comprises annual observations for 135 developing and transition countries, spanning 1970-2007. The data for exchange rate regimes is based on the Reinhart and Rogoff exchange rate regime classification, whereas the data for remittances and all other variables are from the World Banks World Development Indicators database. The findings indicate that more flexible exchange rate regimes are associated with a greater increase in economic growth following an increase in remittances, but also that the impact of remittances on growth is positive under a fixed exchange rate regime. The estimates suggest that a 1 percent increase in remittances increases per capita growth by about 0.79 percent under a fixed exchange rate regime, and that this effect increases by about 0.13 percent for a 1 point increase in the exchange rate flexibility index. The results further suggest that the effect of remittances under a fixed exchange rate regime is positive in less financially developed countries as well, but do not provide conclusive evidence that this effect varies inversely with exchange rate flexibility in such economies as theorized.

Does institutional quality in developing countries affect remittances

There is some empirical evidence showing that remittances, on average, were about 0.5 percent of GDP in countries with a corruption index higher than the median level, compared to 1.9 percent in countries with a level of corruption lower than the median. It is also arguable, that an improvement in economic institutions would facilitate economic freedom and in turn, reduce the costs of transactions associated with remittances in recipient countries. The quality of institutions in developing countries therefore, could be an important determinant of remittances, which are now considered an essential source of external finance in these countries. Thus, this paper explores the role of institutions in driving the flow of remittances to developing countries. The study uses a sample of 90 countries, and data from the World development Indicators (WDI) and Economic Freedom of the World (EFW) indicators databases. The paper estimates both static and dynamic representations of a reduced form model for the determinants of remittances. The static panel models are estimated using the fixed effects estimator, whereas the dynamic models, represented by autoregressive-distributed lag models, are estimated using a generalized method of moments (GMM) estimator. The results show that an improvement in the quality of institutions in charge of the conduct of monetary policy has a positive impact on remittances, and that this impact increases with the quality of such institutions. The estimates also show that an improvement in the operations of institutions of government leads to an increase in the inflow of remittances, which suggests that a decrease in direct government control or participation in the private sector has positive impact on remittances. Sound monetary policy and an effective government are critical to economic freedom, and these results seem to suggest that migrants tend to send remittances in order take advantage of macroeconomic environments that are favorable to better economic performance. Furthermore, the findings provide evidence, albeit a weak one, which suggests that an improvement in the legal system and property rights may be associated with an increase in remittances, but that the effect is lower for countries with an index value greater than the median level. Ergo, to the extent that remittances have become an important source of external finance, policies promoting sound and accountable local institutions should be a priority for policy makers in developing countries.