Remittances and the Dutch disease

Pablo Acosta, Emmanuel Lartey and Federico Mandelman

No 2007-08, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: Using data for El Salvador and Bayesian techniques, we develop and estimate a two-sector dynamic stochastic general equilibrium model to analyze the effects of remittances in emerging market economies. We focus our study on whether rising levels of remittances result in the Dutch disease phenomenon in recipient economies. We find that, whether altruistically motivated or otherwise, an increase in remittances flows leads to a decline in labor supply and an increase in consumption demand that is biased toward nontradables. The increase in demand for nontradables, coupled with higher production costs, results in an increase in the relative price of nontradables, which further causes the real exchange rate to appreciate. The higher nontradable prices serve as an incentive for an expansion of that sector, culminating in reallocation of labor away from the tradable sector. This resource reallocation effect eventually causes a contraction of the tradable sector. A vector autoregression analysis provides results that are consistent with the dynamics of the model.

Date: 2007
New Economics Papers: this item is included in nep-dev and nep-mig
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Journal Article: Remittances and the Dutch disease (2009)
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