Remittance inflows and state-dependent monetary policy transmission in developing countries

Arbeitspapier

Remittance inflows from overseas workers are an important source of foreign funding for developing and emerging economies. The literature is in- conclusive about the cyclical nature of remittance inflows. To the extent remittances are procyclical they pose a challenge to monetary policy: a tightening of policy will be less effective if at the same time remittances increase strongly. The same is true for a policy easing under exceptionally weak remittance inflows. This paper estimates a series of nonlinear (smooth-transition) local projections to study the effectiveness of monetary policy under different remittance inflows regimes. The model is able to provide state-dependent impulse response functions. We show that for Kenya, Mexico, Colombia and the Philippines monetary policy indeed has a smaller domestic effect under strong inflows of remittances. These results have important implications for the design of inflation targeting in developing countries.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: MAGKS Joint Discussion Paper Series in Economics ; No. 38-2016

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Business Fluctuations; Cycles ; Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
• Subject: remittance inflows ; monetary policy ; inflation targeting ; smooth-transition model ; local projections

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Machasio, Immaculate ; Tillmann, Peter
• Event: Veröffentlichung
• (who): Philipps-University Marburg, School of Business and Economics
• (where): Marburg
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/155650