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IMPACTS OF REMITTANCES ON EXCHANGE RATES AND NET EXPORT

Article in Global Economy Journal · September 2021

DOI: 10.1142/S2194565921500068

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Global Economy Journal
2150006 (17 pages)
© World Scientific Publishing Company
DOI: 10.1142/S2194565921500068

IMPACTS OF REMITTANCES ON EXCHANGE

RATES AND NET EXPORT

SEYEDSOROOSH AZIZI
Purdue University Northwest
Hammond, IN, USA
[email protected]

This study investigates the impacts of workers’ remittances on real exchange rates and net
export by using data for 101 developing countries from 1990 to 2015. One challenge in
addressing the impacts of remittances on real exchange rates is the endogeneity of
remittances. To address the endogeneity of remittances, we estimate bilateral remittances
and use them to create weighted indicators of remittance-sending countries. These weighted
indicators are used as instruments for remittance inflow to remittance-receiving countries.
Results obtained in this study indicate that remittances lead to real exchange rates appre-
ciation and net export reduction in remittance-receiving countries.

Keywords: Migration; remittances; real exchange rates; net export; Dutch disease.

1. Introduction
Between 1990 and 2015, the number of individuals living outside their countries of
birth grew from 153 million people to 244 million people, which corresponds to
2.87% of the world population in the year 1990 and 3.32% of the world population
in the year 2015 (United Nations). The total amount of remittances has risen from
$68 billion in 1990 to $553 billion in 2015. The average amount of money each
migrant remitted (in 2011 constant dollars) has risen from $688 in 1990 to $2,128
in 2015 (the World Bank, United Nations, author’s calculations).
Although remittances helped the remittance-receiving countries in many ways,
namely in the form of poverty and inequality reduction and enhanced human capital
and financial development, there are some undesirable consequences as well. For
example, remittances might reduce labor supply, deteriorate governance and insti-
tution, and appreciate real exchange rate and hence weaken the tradable sector of the
economy in remittance-receiving countries. The focus of this paper is the latter
concern: whether remittances appreciate remittance-receiving currencies and reduce
net export? In order to investigate the impact of remittances on real exchange rates
and net export, we use data for 101 developing countries from 1990 to 2015.

2150006-1
S. Azizi

In the past few years, many researchers have examined the relationship between
remittances, exchange rates, and Dutch disease. Dutch disease is the loss of
competitiveness of the nonresource tradable sector (export sector) due to an
appreciation of the exchange rate after a substantial inflow of resources from one
particular sector (remittances, in the case of this paper). The primary barrier in
investigating this topic is the endogeneity of remittances. Remittances are en-
dogenous to exchange rates. Reverse causality and measurement error are among
the sources of endogeneity.
To address the endogeneity of remittances, this research uses a novel instru-
mental variable (IV) approach by incorporating three economic indicators of the
remittance-sending countries as instruments: per capita Gross National Income
(GNI), unemployment rate, and real interest rate. Since each remittance-receiving
country has many countries as the sources of remittances, building the instruments
requires knowing the bilateral remittances to calculate the weighted average
indicators of the remittance-sending countries. Because bilateral remittances are
not generally available, we estimate them and use them as weights to build the
instruments. This estimation strategy allows utilizing three valid and strong
instruments, which are related to remittance-sending countries, to investigate the
impacts of workers’ remittances on exchange rates and net exports in remittance-
receiving countries. The results obtained in this paper indicate that remittances
appreciate real exchange rates and reduce net exports in remittance-receiving
countries.
The rest of the paper is arranged as follows. The literature review is provided in
Sec. 2. Section 3 discusses the data used in this paper. Section 4 is devoted to the
econometric model. Section 5 discusses the endogeneity problem and instrumental
variables. Section 6 presents empirical results, and Sec. 7 provides conclusions.

2. Literature Review
This surge in the value of remittances has attracted the attention of many
researchers. During recent years, different aspects of remittances have been under
the scrutiny of researchers. Some of the aspects of remittances that have been
investigated vigorously are motivations behind remittances (El-Sakka and
McNabb, 1999; Carling, 2008; Azizi, 2017, 2019, 2021); remittances and uncer-
tainty (Khanal and Todorova, 2019); remittances and human capital as most
researchers have found remittances increase human capital in remittance-receiving
countries (Calero et al., 2009; Azizi, 2018; Howard and Stanley, 2017); remit-
tances and poverty as most researchers have found remittances reduce poverty in
remittance-receiving countries (Adams and Page, 2005; Azizi, 2019, 2021);
remittances and inequality (Giannetti et al., 2009) remittances and growth (Konte,

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 Impacts of Remittances on Exchange Rates

2018); remittances and financial development as most researchers have found

remittances increase financial development in remittance-receiving countries
(Adeniyi et al., 2019; Kakhkharov and Rohde, 2018; Bettin and Zazzaro, 2012;
Azizi, 2020; El-Sakka and McNabb, 1999); cyclicality of remittances (Correia and
Martins, 2019). However, remittances might damage remittance-receiving coun-
tries in a number of ways. For example, remittances might reduce labor supply in
remittance-receiving countries (Airola, 2008; Mughal and Makhlouf, 2013). An-
other way that remittances might harm remittance-receiving countries is by
appreciating real exchange rates and reducing net export in these countries, which
is the topic of this paper.
Many studies have investigated the impacts of remittances on real exchange
rates in a group of countries. In the following, we go through some of these papers.
Amuedo-Dorantes and Pozo (2004) test the impact of workers’ remittances on
the real exchange rate using a panel of 13 Latin American and Caribbean countries.
After instrumenting for remittances they conclude that remittances appreciate
real exchange rate in remittance-receiving countries. Therefore, remittances have
the potential to impose economic costs on the export sector of receiving
countries by reducing its international competitiveness. They use a set of variables
related to remittance-receiving countries as instruments for remittances. Ball et al.
(2013) use a panel of 21 countries and both theoretically and empirically show that
remittances appreciate real exchange rates under both a fixed exchange rate
regime and a flexible regime. Lopez et al. (2007) focus on Latin American
countries and find that remittances appear to lead to a significant real exchange
rate appreciation.
Some studies have examined the impacts of remittances on exchange rates in all
developing countries. In the following, we go through some of these papers.
Using a panel data set comprising 109 developing and transition countries for
the period from 1990 to 2003, Lartey et al. (2012) find that rising levels of
remittances have spending effects that may lead to real exchange rate appreciation,
and resource movement effects that favor the nontradable sector at the expense of
tradable goods production. Acosta et al. (2009a) investigate the effect of remit-
tances on the real effective exchange rate conditional on the level of financial sector
maturity in developing countries. Like other studies, they find out that remittances
can raise the exchange rate. However, they argue that how much the local currency
appreciates depends on how well the domestic economy can channel the remitted
capital into new investments. Thus, countries with deeper and more sophisticated
financial markets should help assuage the appreciation effects of remittances on the
local currency. Hassan and Holmes (2013) examine the long-run relationship be-
tween remittances and the real exchange rate for less-developed countries. They
find a small inelastic, but significant, long-run relationship which confirms a Dutch

2150006-3
S. Azizi

disease effect. They also investigate the short-run relationship between remittances
and exchange rates using a panel vector error correction model and confirm that
remittances appreciate exchange rates.
Although almost all studies have found that remittances appreciate real ex-
change rates in remittance-receiving countries, the following studies concluded that
real exchange rates appreciation only happens in some countries.
Barajas et al. (2011) find regional differences in the impacts of remittances on
real exchange rates. The Middle East–North African countries are most likely to
experience the conventional upward effect of rising remittance inflows on the real
exchange rate, and Asian countries less likely to do so. Beja Jr (2011) finds that
Dutch disease caused by international remittances afflicts the middle-income
countries but not the upper income and low-income countries. Alonso Gonzalez
and Sovilla (2014) find that remittances cause the Dutch disease and they propose
demand policies combined with central bank purchases of foreign currency in the
foreign exchange market to neutralize the negative impact of remittances on ex-
change rates.
Many studies have addressed the impacts of remittances on real exchange rates
and exports in a single country. All of these studies have concluded that remit-
tances cause real exchange rates appreciation in the remittance-receiving country.
We review some of these studies.
Using data for the Philippines, Mandelman (2013) estimates a general equi-
librium model for a small open economy and concludes the equilibrium level of the
real exchange rate appreciates upon a steady increase (trend growth) in remittances.
Sapkota (2013) investigates impacts of remittances on Nepal’s economy and
concludes although, remittances have reduced poverty and inequality, however,
remittances have also contributed to the Dutch disease effect and real exchange rate
appreciation. Using Bayesian methods and Salvadorian data, Acosta et al. (2009b)
develop and estimate a general equilibrium model of a small open economy and
conclude that an increase in remittances causes Dutch disease effects. Bourdet and
Falck (2006) find that the inflow of remittances to Cape Verde has an appreciating
effect on the real exchange rate and contributes to deteriorated competitiveness.
Makhlouf and Mughal (2013) focus on Pakistan and conclude that while aggregate
remittances and the remittances from the Persian Gulf contribute to the Dutch
disease in Pakistan, those from North America and Europe do not. Vargas-Silva
(2009) finds that remittances appreciate the Mexican peso and therefore, may
impact the competitiveness of the tradable sector negatively. Using Johansen
Cointegration and Vector Error Correction Model and annual data from 1971 to
2008, Chowdhury and Rabbi (2014) conclude that the influx of remittances sig-
nificantly appreciates the real exchange rate and deteriorates the external trade
competitiveness of Bangladesh.

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 Impacts of Remittances on Exchange Rates

Many papers in the literature have expressed the endogeneity concern in

investigating the impact of remittances on exchange rates. Remittances may be
endogenous to real exchange rates in the remittance-receiving countries. The en-
dogenous relationship between workers’ remittances and real exchange rates can
be explained by reverse causality. There exists a reverse causality between real
exchange rates and remittances. Not only remittances impact real exchange rates
but also real exchange rates impact remittances. For example, Faini (1994) shows
that real exchange rates play a crucial role in affecting the remittance behavior of
migrants in a sample of five Mediterranean countries. Also, Yang (2008) shows that
appreciation of a migrant’s currency against the Philippine peso leads to increases
in household remittances from overseas.
Measurement error is another source of endogeneity. Officially recorded
remittances do not include remittance in kind, unofficial transfers through kinship
or through informal means such as hawala operators, friends, and family members.
The negative impact of transactions costs on remittances encourages migrants to
remit through informal channels when costs are high. Transfer costs are higher
when financial systems are less developed. Evidence from household surveys also
show a sizable informal sector (Freund and Spatafora, 2008). Since poor countries
usually are less financially developed, migrants from poor countries are more likely
to remit through informal channels. Because income might be correlated with
exchange rates, measurement error is also one of the sources of endogeneity.

3. Data
This study examines 101 developing (poor and middle-income) countries.1 The
annual data has a time span of 1990 to 2015. All dollar values in this paper are
constant 2011 US dollars.
Data on remittances come from the International Monetary Fund (IMF), which
has defined remittances as the sum of two components: personal transfers
(workers’ remittances) and compensation of employees. The World Bank has
adopted the same definition. In this study, we only focus on workers’ remittances.
Remittances are divided by remittance-receiving countries’ populations and con-
verted in constant 2011 US dollars. The income variable in Eq. (1) is per capita
Gross Domestic Product (GDP) in constant 2011 US dollars adjusted for pur-
chasing power parity (PPP).
In this paper, we investigate the impacts of remittances on real exchange rates
and net export. Real exchange rate is defined as exchange rates adjusted for in-
flation. Net export is defined as export minus import. This study uses three

1 The list of countries is provided in Appendix A.

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S. Azizi

Table 1. Descriptive statistics.

Variable N Mean Std Dev Minimum Maximum

Real exchange rate 1759 3.92 2.57 0.89 10.56

Net export 1759 9.97 15.59 161.43 45.26
Remittance per capita 1759 101.77 167.57 0 1577.36
GDP per capita 1759 6163.57 4844.78 583.05 27319
Broad money to GDP (%) 1759 42.83 28.2 3.76 249.59
Government consumption expenditure 1759 14.23 6.36 3.11 88.98
to GDP (%)
Trade openness to GDP (%) 1759 74.33 33.83 11.09 311.36

instruments to address the endogeneity of workers’ remittances: weighted average

per capita GNI, unemployment rate, and real interest rate of remittance-sending
countries. Data on GNI and populations are from the United Nations. Data on
unemployment rates and real interest rates are from the World Development
Indicators. Real interest rate is defined as lending interest rate adjusted for inflation
as measured by the GDP deflator. A summary of descriptive statistics is provided
in Table 1.

4. Econometric Model
We use a panel of 101 developing countries to analyze how workers’ remittances
affect real exchange rates and net export. The relationship that we estimate can be
written as
Eit ¼ β0 þ β1 Rit þ β2 Iit þ X it0 γ þ δi þ eit ð1Þ
for i ¼ 1, . . . , N and t ¼ 1, . . . , Ti where E is real exchange rate or net export in
country i at time t, β0 is the intercept, Rit is the per capita remittances received by
country i at year t, Iit is the mean per capita income of country i at year t, Xit is a
vector of other variables that potentially affect Eit . More specifically, Xit includes
the ratio of broad money to GDP, the ratio of government expenditures to GDP, and
the ratio of trade openness (defined as sum of export and import) to GDP. δi is
country dummy and eit is the error term. All variables, except net export, are in
logarithm.
When Eit is the real exchange rate for country i at time t, it is defined as
PUS, t
Eit ¼ eit  , ð2Þ
Pit
where eit and pit are the nominal exchange rates (units of home country currency
per US dollar: e.g. 10 pesos/dollar) and the Price Index of country i at year t,

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 Impacts of Remittances on Exchange Rates

respectively. Therefore, a rise in Eit means a real depreciation in country’s currency

and a fall in Eit means a real appreciation in country’s currency. The price index
used in this research is GDP deflator. The GDP deflator data is from the United
Nations.
One econometric issue that arises is that the error terms are autocorrelated and
also they do not have constant variance, which shows the existence of hetero-
skedasticity. To overcome autocorrelation and heteroskedasticity, Newey–West
Heteroskedasticity and Autocorrelation Consistent (HAC) standard errors are used.
In other words, since we worry that there might be some serial correlation in the
error terms even after controlling for fixed effects and endogeneity of remittances,
I adjust standard errors to account for heteroskedasticity and autocorrelation by
using autocorrelation HAC standard errors.

5. Endogeneity Problem and Instrumental Variables

Due to endogeneity of remittances, least squares estimates of the impact of
remittances may be biased as remittance is endogenous. The traditional way, which
is followed in this paper, is to resolve the endogeneity problem by using instru-
mental variables. In this research, we introduce three instruments that are correlated
with remittances and uncorrelated with the dependent variables unless through
explanatory variables. Workers’ remittances, by definition, are money sent by
migrants from remittance-sending countries to their home countries (remittance-
receiving countries). The value of remittances hinges on both remittance-sending
and remittance-receiving countries economic variables. Since the dependent vari-
ables belong to remittance-receiving countries, in order to ensure the instruments
are valid, we should select a number of economic variables from remittance-
sending countries. Three variables used in this research as instruments are per
capita GNI, unemployment rate, and real interest rate. If the remittance-sending
country’s per capita GNI increases, it means migrants’ income has increased,
which means they have more money available to spend and remit. Therefore, it can
be expected that remittances increase in response to a rise in the remittance-sending
country’s per capita GNI. If the unemployment rate goes up in the remittance-
sending country, some migrants will lose their jobs, and the total remittances sent
by migrants will decrease. If the real interest rates go up in the remittance-sending
country, migrants have more incentive to invest in the host country rather than the
home country, and they will remit less.
Table 2 shows the results of regressing per capita remittances on these
three instrumental variables while in each column different covariates have been
used. Note that in all columns the parameter estimate for the impact of per
capita GNI in remittance-sending countries on remittances is significant and

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S. Azizi

Table 2. First stage regressions.

Column number (1) (2) (3) (4)

Instrumental Per capita GNI 0.97*** 1.06***

variables in remittance-sending countries (0.08) (0.08)
Unemployment rate 0.05*** 0.11***
in remittance-sending countries (0.0136) (0.0134)
Real interest rate 0.018*** 0.02***
in remittance-sending countries (0.004) (0.0043)
Exogenous Per capita GDP 0.388*** 0.4*** 0.6*** 0.535***
variables in remittance-receiving countries (0.053) (0.052) (0.052) (0.054)
Broad money to GDP 0.014*** 0.015*** 0.019*** 0.02***
in remittance-receiving countries (0.0015) (0.0015) (0.0016) (0.0016)
Government expenditure to GDP 0.0067 0.03*** 0.029*** 0.038***
in remittance-receiving countries (0.0077) (0.0069) (0.0076) (0.0077)
Trade openness to GDP 0.006*** 0.006*** 0.008*** 0.006***
in remittance-receiving countries (0.0013) (0.0013) (0.0013) (0.0013)
Number of observations 1891 1891 1891 1891
R-squared 0.3 0.29 0.24 0.22
F-statistic for weak instruments 78 192 65 22

Notes: The dependent variable in the first stage regression is per capita remittances.
***Significant at 1% level.
**Significant at 5% level.
*Significant at 10% level.

positive, the parameter estimates for the impact of unemployment rate and real
interest rates in remittance-sending countries on remittances are significant and
negative.
The IMF provides workers’ remittances data annually. Unfortunately, the
IMF does not provide bilateral remittance data. Bilateral remittance means how
much money a remittance-receiving country receives from each specific re-
mittance-sending country. Therefore, although we know how much remittance
each remittance-receiving country receives in any year in total, we do not know
how much of the received remittances comes from a specific remittance-sending
country.
The main challenge in constructing instruments is that each remittance-
receiving country has more than one remittance-sending country. Therefore, rather
than per capita GNI, unemployment rate, and real interest rate in the remittance-
sending country, weighted average of the remittance-sending countries’ indicators
should be used as instruments. For remittance-receiving country i, in year t, the

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 Impacts of Remittances on Exchange Rates

weights of each remittance-sending country j is

Remittances from country j to country i in year t
Wjit ¼ : ð3Þ
Total remittances received by country i in year t
However, calculating these weights entails knowing bilateral remittances (i.e.
how much remittances each remittance-receiving country receives from each re-
mittance-sending country). Although the value of remittances each country
receives is known, unfortunately, there is no comprehensive bilateral remittances
data, and we do not know the amount of remittances received from each individual
remittance-sending country. To overcome this problem, a specific method devel-
oped by Ratha and Shaw (2007)2 is used in this paper to estimate bilateral
remittances for all countries from 1990 to 2015.
Fortunately, the UN has provided a comprehensive bilateral migration data from
1990 to 2015. This means we know how many immigrants live in each host
country, and we also know how many of them are from each specific home
country. We used this dataset, per capita GNI of remittance-sending countries, and
per capita GNI of remittance-receiving countries to estimate bilateral remittances.
We then use estimated bilateral data to construct weighted averages of per capita
GNI, unemployment rate, and real interest rate of remittance-sending countries.
These weighted average indicators are used as instruments to address the endo-
geneity of remittances.
For remittance-receiving country i at time t, we define
X
214
Y it ¼ wjit Yjt ,
j¼1

2 Ratha and Shaw (2007) propose a method of “Calculating weights based on migrant stocks, per capita income in
the destination countries, and per capita income in the source countries”.
The average remittance sent by a migrant from host country j to home country i (rij ) is modeled as a function of the
per capita income of the home country and the host country.
(
Yi if Yj < Y i ,
rij ¼ f (Y i Yj ) ¼
Y i þ (Yj  Y i ) β otherwise,

where Yj is the average per capita GNI of host country j, Y i is the per capita GNI of the migrant’s home country,
and β is a parameter between 0 and 1. The amount sent by an average migrant is assumed to be at least as much as
the per capita income of the home country, even when the individual migrates to a lower-income country. The
rationale is that the migration occurs in the expectation of earning a higher level of income for the dependent
household than what the migrant would earn in her home country. To estimate bilateral remittances for all
countries, they use the average β (equal to 0.75) for the top 20 remittance-receiving countries. Then, for each home
country i, rij is used to build weights for each host country j as
rij Mij
Wij ¼ P 214 :
j¼1 rij Mij

2150006-9
S. Azizi

where Y it is one of the following variables: weighted average per capita GNI,
unemployment rate, and real interest rate of the remittance-sending countries. wjit
is the weight as defined by Eq. (2) and Yjt is one of the following: per capita
GNI, unemployment rate, or real interest rate of the remittance-sending country j
at year t.
Two main concerns of using instrumental variables method, to address the
problem of endogeneity, are validity and strength of the instruments. The reason
that in this paper bilateral remittances are estimated, and economic variables re-
lated to remittance-sending countries are used is to guarantee the validity of the
instruments. More specifically, selecting economic variables from remittance-
sending countries, rather than from remittance-receiving countries, as instruments
is to ensure the validity of instruments. The other concern about the instruments is
whether they are strong or not. The whole process of estimating bilateral remit-
tances and use them as the weights of remittance-sending countries is to ensure that
instruments are strong. To investigate the strength of the instruments, first stage
regressions are examined. The results of the first stage regressions are provided in
Table 2. Note that F-statistics for weak instruments is 78, which indicates the
instruments are very strong.

6. Results
In all regressions, the results of the IV approach are reported alongside the results
of the Ordinary Least Squares (OLS) model and Fixed Effect (FE) model. FE and
OLS models are similar in all aspects except one. Unlike the OLS model, the FE
model includes country-specific effects and addresses time-invariant cross-country
effects. However, both OLS and FE results are inconsistent and biased. They are
presented in this paper for comparison purposes. To address both endogeneity and
time-invariant cross-country effects simultaneously, all IV estimates also include
country-specific effects. The estimates for the impacts of remittances on real ex-
change rates are presented in Table 3.
In the first regression (columns (1a), (1b), and (1c)), the ratio of broad money to
GDP, the ratio of government expenditures to GDP, and the ratio of trade openness
(defined as sum of export and import) to GDP are used as explanatory variables
alongside per capita remittances and per capita GDP. The control variables are
some of the most common variables in the literature. For example, look at Lartey
et al. (2012). Both OLS and FE models underestimate the impacts of remittances
on real exchange rates and the effect captured by the IV is larger (in magnitude)
than the effects captured by the OLS or the FE. The results of IV regression
suggest that, on average, a 10% increase in per capita remittances will lead to a
1.4% appreciation in real exchange rates. In OLS model the R-squared is 0.19 but

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 Impacts of Remittances on Exchange Rates

Table 3. Impact of remittances on real exchange rate.

Column number (1a) (1b) (1c) (2a) (2b) (2c)

Model OLS FE IV-FE OLS FE IV-FE

Remittance per capita 0.13*** 0.06*** 0.14*** 0.13*** 0.09*** 0.24***

(0.036) (0.0206) (0.0486) (0.033) (0.0215) (0.0528)
GDP per capita 0.97*** 0.23*** 0.039 0.96*** 0.6*** 0.079
(0.0935) (0.0894) (0.1416) (0.0925) (0.1718) (0.22)
Broad money to GDP 0.006 0.0043** 0.0007 0.008* 0.02*** 0.02***
(0.0045) (0.0019) (0.00168) (0.0046) (0.0052) (0.0058)
Government expenditure 0.06*** 0.00008 0.00226
to GDP (0.0155) (0.003) (0.00275)
Trade openness to GDP 0.007 0.0008 0.002*** 0.004* 0.003** 0.0001
(0.00249) (0.008) (0.00068) (0.0023) (0.00136) (0.0014)
Number of observations 1759 1759 1759 1893 1893 1893
R-squared 0.19 0.94 0.94 0.19 0.93 0.92

Notes: HAC standard errors are in parentheses. FE and IV models include country dummies.
***Significant at 1% level.
**Significant at 5% level.
*Significant at 10% level.

in FE and IV-FE models R-squared is 0.94. This means country-specific effects can
explain 75% of changes in real exchange rates and by far is the most important
factor.
Since the ratio of government expenditures to GDP per capita is not significant
in the first regression, we dropped it from the regression. In the second regression
(columns (2a), (2b), and (2c)), assuming that estimates from the IV model are
closest to the true values of parameters, both OLS and FE models underestimate
the magnitude impacts of remittances on real exchange rates. Once again, the
results of IV regression provided in column (2c) suggest that remittances cause
currency appreciation.
The fact that the parameter estimates for remittances are negative and statisti-
cally significant across both regressions and three models (OLS, FE, and IV-FE)
shows that the results are robust and we can conclude that a rise in remittances will
cause a currency appreciation in remittance-receiving countries. The estimates for
the impacts of remittances on net export are presented in Table 4.
The same explanatory variables are used in Tables 3 and 4. After instrumenting
for the endogeneity of remittances and controlling for country-fixed effects, results
provided in columns (1c) and (2c) of Table 4 indicate that remittances reduce the
net export of remittance-receiving countries. However, note that all explanatory

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S. Azizi

Table 4. Impact of remittances on net export.

Column number (1a) (1b) (1c) (2a) (2b) (2c)

Model OLS FE IV-FE OLS FE IV-FE

Remittance per capita 2.89*** 1.73*** 5.4*** 2.88*** 1.7*** 4.02***

(0.204) (0.27) (0.77) (0.204) (0.246) (0.63)
GDP per capita 10.16*** 12.6*** 18.1*** 10.12*** 12.9*** 13.5***
(0.6762) (1.6) (2) (0.645) (1.48) (1.5)
Broad money to GDP 0.02 0.08*** 0.003 0.04*** 0.08*** 0.024
(0.0133) (0.0188) (0.0023) (0.013) (0.016) (0.0189)
Government expenditure 0.49*** 0.17** 0.04
to GDP (0.1456) (0.00873) (0.077)
Trade openness to GDP 0.12*** 0.1*** 0.072** 0.15*** 0.1*** 0.08***
(0.033) (0.0315) (0.0326) (0.028) (0.0287) (0.0293)
Number of observations 1901 1901 1891 2039 2039 2029
R-squared 0.42 0.79 0.73 0.39 0.78 0.75

Notes: HAC standard errors are in parentheses. FE and IV models include country dummies.
***Significant at 1% level.
**Significant at 5% level.
*Significant at 10% level.

variables are in logarithm but net export is not used in logarithm (since for many
countries net export is negative, we did not use the logarithm). Therefore, based on
column (2c) of Table 4 a 100% increase in remittance per capita leads to 4%
decrease in net exports. The negative and statistically significant parameter esti-
mates for remittances across both regressions and three models indicate that the
results are robust and we can conclude that a rise in remittances will cause a fall in
net export in remittance-receiving countries.

7. Conclusion
The total amount of remittances has risen from $68 billion in 1990 to $553 billion
in 2015. Although receiving remittances help many developing countries to reduce
poverty and increase human capital and financial development, remittances might
damage remittance-receiving countries as well. This paper investigates the impacts
of workers’ remittances on real exchange rates and net export. The dataset that is
used in this paper includes 101 developing countries from 1990 to 2015.
One challenge in addressing the impacts of remittances on real exchange rates is
the endogeneity of remittances. Not only remittances impact real exchange rates,
but also migrants might increase or decrease the amount of money that they remit
in response to rise or fall in exchange rates. To address the endogeneity of

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 Impacts of Remittances on Exchange Rates

remittances, we estimate bilateral remittances and use them to calculate weighted

per capita GNI, unemployment rate, and real interest rate of remittance-sending
countries. Selecting economic variables from remittance-sending countries, rather
than from remittance-receiving countries, as instruments is to ensure the validity of
instruments. Estimating bilateral remittances and use them as the weights of re-
mittance-sending countries is to ensure that instruments are strong.
This novel approach of constructing instruments can be applied to address the
endogeneity problem while exploring the impact of remittances on many socio-
economic variables such as education, health, labor supply, poverty, inequality,
growth, and financial development. Moreover, using weighted average remittance-
sending countries’ indicators as instruments for remittances, where weights are
determined by estimated bilateral remittances, can be used in both country-level
studies and household-level studies. Estimated bilateral remittances also can be
used to construct instruments in addressing endogeneity when researchers study
the impact of remittances on some economic variables in a single country.
The results obtained in this paper show that remittances cause real exchange rate
appreciation and reduction in net exports in remittance-receiving countries.
International migrants usually work hard in the host countries and save a portion
of their income to remit a part of their savings and either invest or support their
families. Remittances are supposed to help the remittance-receiving countries, but
unfortunately, that is not the case always. Remittances have the potential to
appreciate the real exchange rate of remittance-receiving countries and therefore
weaken the competitiveness of their economies and reduce their export. We find
that, on average, a 10% increase in per capita remittances will lead to a 1.4%
appreciation in real exchange rates.
A rise in remittances appreciates real exchange rates. Real exchange rate
appreciation reduces economic competitiveness and export of remittance-receiving
which in turn causes Dutch disease and shifts of resources from the traded to the
nontraded sectors of the economy (for example real estate). One way that gov-
ernments can mitigate this impact of remittances is by directing them toward
investment rather than consumption. If a considerable part of workers’ remittances
is devoted to boost investment, these expenditures on capital goods will generate
higher income and will enhance the capacity of production, which in turn increases
exports. However, as long as all or substantial share of remittances are sent for
altruistic purposes and spent on consumption, real exchange rates will appreciate.
This might seem ironic that when migrants want to support their families they
might damnify their countries economy. The best way to address this dilemma is to
channel remittances to investment, maybe by incentivizing migrants or their
families to do so by tax exemptions. In this case, since remittances are not spent on
consumption products they will have less impact on exchange rates in the short run

2150006-13
S. Azizi

and they will boost production and export in the long run. However, channeling
remittances toward investment and encouraging migrants and their families to not
spend their money on consumption might be hard or impossible if they are in
immediate need of remittances and in case that survival of the families depends on
remittances.

Appendix A

Table A.1. List of countries.

Name of country Years Name of country Years Name of country Years

Afghanistan 2008–2015 Georgia 1997–2015 Niger 1990–2015

Albania 1994–2015 Ghana 1990–2015 Nigeria 1990–2015
Algeria 1990–2015 Guatemala 1990–2015 Pakistan 1990–2015
Angola 2008–2015 Guinea 2004–2015 Panama 1990–2015
Armenia 1993–2015 Guinea-Bissau 1990–2013 Papua New Guinea 2002–2004
Azerbaijan 1999–2015 Guyana 1996–2015 Paraguay 1995–2015
Bangladesh 1990–2015 Haiti 1998–2015 Peru 1990–2015
Belize 1990–2015 Honduras 1990–2015 Philippines 1990–2015
Benin 1992–2015 India 1990–2015 Romania 1994–2015
Bhutan 2006–2015 Indonesia 1990–2015 Russian Federation 2001–2015
Bolivia 1990–2015 Iraq 2005–2015 Rwanda 1990–2015
Bosnia and 2005–2015 Jamaica 1990–2015 Senegal 1990–2015
Herzegovina
Botswana 1996–2015 Jordan 1990–2015 Serbia 2007–2015
Brazil 1990–2015 Kazakhstan 1990–2015 Sierra Leone 2006–2015
Bulgaria 2005–2015 Kenya 1994–2015 Solomon Islands 2002–2015
Burkina Faso 2005–2014 Kyrgyz Republic 1994–2015 Sri Lanka 1990–2015
Burundi 2004–2015 Lao PDR 2008–2015 Sudan 1990–2015
Cabo Verde 2007–2015 Lesotho 2007–2015 Suriname 2005–2015
Cambodia 1994–2015 Liberia 2004–2015 Swaziland 2004–2015
Cameroon 1990–2015 Libya 2000–2006 Tajikistan 2002–2015
Chad 1992–1994 Macedonia, FYR 1996–2015 Tanzania 2001–2015
China 1990–2015 Madagascar 1990–2015 Thailand 2005–2015
Colombia 1990–2015 Malawi 1994–2015 Timor-Leste 2006–2015
Comoros 2003–2012 Mali 1990–2015 Togo 1990–2015
Congo, Rep. 1995–2004 Mauritania 1990–1991 Tonga 1990–2012
Costa Rica 1995–2015 Mexico 1990–2013 Tunisia 1990–2015
Cote d’Ivoire 2005–2013 Moldova 1995–2015 Turkey 1990–2015
Dominican Republic 1990–2015 Mongolia 1998–2015 Uganda 1999–2015
Ecuador 1990–2015 Montenegro 2007–2015 Ukraine 2001–2015
Egypt, Arab Rep. 1990–2015 Morocco 1990–2015 Vanuatu 1990–2015
El Salvador 1990–2015 Mozambique 2007–2015 Venezuela, RB 2008–2013

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 Impacts of Remittances on Exchange Rates

Table A.1. (Continued )

Name of country Years Name of country Years Name of country Years

Fiji 2000–2015 Namibia 2002–2015 Yemen, Rep. 2005–2013

Gabon 1995–2015 Nepal 1993–2015 Zambia 2010–2015
Gambia 2003–2015 Nicaragua 1999–2015

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