Estimating dynamic macroeconomic effects of exogenous remittances

Abstract

We use a local projection instrumental variable approach to estimate dynamic macroeconomic effects of temporary, exogenous remittance shocks. We identify exogenous remittance shocks by instrumenting remittances with the migrant-share-weighted GDP per capita of migrants’ destination countries. Impulse response functions show that the identified remittance shock is temporary and that it has a significant positive effect on remittance-recipient countries’ real GDP per capita on impact, and cumulatively over the medium term, e.g. over periods of 5 and 10 years. Household consumption and investment significantly increase while the ratio of net exports over GDP decreases. We also find that the increase in exogenous remittances causes a significant increase in external debt and a significant decrease, on impact, in the external debt servicing cost as a fraction of GNI. Our empirical results are consistent with the predictions of the model by Bahadir et al. (2018) for the case in which an exogenous, temporary remittance inflow accrues to credit-constrained entrepreneurs.