PhD Seminar: Remittances, Trade and the Real Exchange Rate

Remittances, Trade and the Real Exchange Rate

This paper examines the dynamic effects of remittances on trade, investment, formal employment, and the real exchange rate. To identify exogenous variation in remittance inflows, we instrument remittances using migrant-weighted GDP per capita of migrants’ destination countries and estimate impulse response functions using instrumental-variable local projections. The results show that remittance shocks lead to a temporary appreciation of the real exchange rate, consistent with the expenditure-switching channel emphasised in the Dutch disease literature. However, contrary to the prediction that tradable activities contract following foreign-currency inflows, export shares and trade openness increase following remittance shocks. Also, remittances generate substantial increases in investment in both tradable and non-tradable activities. Formal employment also rises following remittance shocks, although labour-market adjustment occurs more gradually than investment responses. Overall, the evidence suggests that the collateral effects of remittances dominate their expenditure-side effects. While remittances appreciate the real exchange rate, they also relax financing constraints, stimulate capital accumulation, and support productive economic activity.