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INWARD WORKERS’ REMITTANCES ANDREAL EXCHANGE RATES IN SOUTH ASIA,
1980‐2011
Molonglo Theatre, Crawford School of Public PolicyNovember 4, 2013
Arjuna Mohottala
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 2
Surge in remittances to developing countries over the past years
1998: US$ 50 bn
2012: US$ 406 bn (World Bank estimate)
Remittances are nearly 3 times the amount of ODA and almost on a par withFDI flows to developing countries
Many research focus on short-run socioeconomic impact
Existing research mostly focus on economic growth, industrialisation andfiscal sustainability
There could be macroeconomic effects such as appreciation of the realexchange rate in response to inward remittances.
BACKGROUND
3
KEY LITERATURE
López, H, Molina, L & Bussolo, M 2007, ‘Remittances and the Real ExchangeRate’,World Bank Policy ResearchWorking Paper 4213.
Focus is on Latin American countries
Distributed lag model
Conclude remittances contribute to real exchange rate appreciation
Lartey, EKK, Mandelman, FS & and Acosta, PA 2008, ‘Remittances, exchangerate regimes, and the Dutch disease: a panel data analysis’, Working Paper2008-12, Federal Reserve Bank of Atlanta.
Generalised method of moments estimator
Period 1990 - 2003
Dutch disease is stronger in fixed exchange rate regimes
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
4
RESEARCH QUESTION
Do inward workers’ remittances result in an appreciation of the real exchange rates in South Asia during 1980-2011?
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
5
RESEARCH QUESTION
Pre-crisis period (2005-2008) witnessed a notable increase in migrant workers fromSouth Asia (World Bank)
South Asia is expected to have received $109 billion in remittances in 2012 (WorldBank)
Table 1 Summary statistics by country: 1980-2011
Country Total Remittances (USD mn) Remittances/GDP REER appreciation1980 2011 1980 2011 1980 - 2011 (%)
Bangladesh 338.67 12,050.62 1.9 10.8 -19.96%India 2,755.69 53,480.00 1.5 3.4 -25.48%Nepal 34.79 4,010.48 2.4 22.3 -13.24%Pakistan 2,047.62 12,235.00 8.6 5.8 -47.69%Sri Lanka 151.70 5,144.84 3.8 8.7 30.91%
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
Do inward workers’ remittances result in an appreciation of the real exchange rates in South Asia during 1980-2011?
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 6
Balanced panel data set for the period 1980 - 2011
The countries included in the research:
Bangladesh
India
Nepal
Pakistan
Sri Lanka
Sources:
IFS and WDI databases
Nepal Rastra Bank
Darvas (2012) for REER index series
DATA
7
HOW THE DATA LOOKS
Bangladesh India Nepal
Pakistan Sri Lanka Remittances growth
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
Figure 1: Remittances flows and REER of selected countries
8
DETERMINANTS OF REAL EXCHANGE RATE
Table 2 Determinants of real exchange rate
Variable Definition Expected sign
Remittances Growth rate of remittances per capita ( + )
Exports Growth rate of exports per capita ( - )
Imports Growth rate of imports per capita ( + )
M2 growth Growth rate of broad money ( - )
Govt. expenditureAnnual growth of government consumption expenditure relative to GDP
( - )
GDP growth Growth rate of the GDP ( + )
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
ESTIMATION
η is an unobserved country-specific effect
λ is a time-specific effect
ε is the error term
9Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
COMPUTATION OF REER
where, is the nominal effective exchange rate of the countryunder study
is the nominal bilateral exchange rate
is is the geometrically weighted average of CPI indicesof trading partners
Darvas (2012) uses time-invariant weights
Basket of countries representative of foreign trade in 1998-2003
Base year for this index series is set as 2007
10Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 11
TESTS
Checks for structural breaks in the remittances flows
Zivot-Andrews unit root test - structural break at an unknown point in time
Chow Test-2
0-1
00
1020
Gro
wth
rate
per
ann
um (%
)
1980 1984 1988 1992 1996 2000 2004 2008 2012
growth rate of reer mean growth rate
Figure 2: Remittances growth rate of selected countries
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 12
TESTS
Tests to assess the stationary of the variables
augmented Dickey-Fuller test
Dickey-Fuller Generalised Leased Square test
Phillips-Perron test
Subsequent to the introduction of the structural break, the variables werestationary at I(0)
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 13
TESTS
Correcting for the endogeneity of remittances
Instrumental variables
Conditioning variables
Estimation technique
No consensus regarding any of these tools has emerged in the literature onremittances
Pablo and Lopez (2008) highlight that longer time horizons may facilitate toobtain the ceteris paribus effect of trade performance on the growth rate ofREER
ESTIMATION RESULTS
14
Table 3 Determinants of the real exchange rate, estimation results
Model Fixed-effects Random-effects OLSVariable Coefficient S.E. Coefficient S.E. Coefficient S.E.
lrem_pc 0.075** 0.027 0.159*** 0.031 0.075** 0.027lex_pc -0.37*** 0.049 -0.195*** 0.048 -0.37*** 0.049lim_pc 0.182** 0.062 -0.009 0.065 0.182** 0.062lrem_pc_br -0.011 0.013 -0.04** 0.012 -0.011 0.013gdp_gr 0.018** 0.006 0.019** 0.007 0.018** 0.006gov_ex_gdp 0.031** 0.007 0.014** 0.005 0.031*** 0.007m2_gr -0.001 0.002 -0.003 0.002 -0.001 0.002_cons 4.729*** 0.144 4.894*** 0.122 4.849*** 0.126N 159 159 159r2 0.2527 0.3361 0.5840legend: * p<0.05; ** p<0.01; *** p<0.001
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
ESTIMATION RESULTS
15
Table 4 Country-specific estimation results
CountryBangladesh India Nepal Pakistan Sri Lanka
Variable
lrem_pc -0.179* -0.046 0.228*** 0.209*** 0.249**
(S.E.) (0.074) (0.065) (0.064) (0.063) (0.1)
lrem_pc_br 0.011 0.025 -0.124 -0.092*** -.016
(S.E.) (0.022) (0.028) (0.046) (0.029) (0.017)
legend: * p<0.10; ** p<0.05; *** p<0.01
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
16
The research looks at a long-term time horizon of 3 decades 1980-2011
The remittances flows to South Asia will continue to grow
Estimated results imply that a 1% increase in remittances per capita appreciates thereal exchange rate on average by 0.12% in South Asia over the time horizon
Developing countries in South Asia should aim to keep the REER close to itsequilibrium level
reinforces the need to have sound macroeconomic policies
Country specific results are different Data reflects Bangladesh’s REER depreciating on average 0.18% p.a.
Since 2002, Pakistan’s REER depreciates on average by 0.09% p.a.
Government expenditure to GDP shows a positive impact - different sign fromwhat is indicated in literature
CONCLUSION
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
17
Include more variables such as FDI , aid and financial flows
Encompass a Panel IV to mitigate the effects of causation
Need more micro-level studies for a clear explanation of the obtained result
CONCLUSION ‐ FUTURE RESEARCH
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011