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Do workers' remittances reduce the probability of current account reversals?

Author

Listed:
  • Bugamelli, Matteo
  • Paterno, Francesco
Abstract
The paper combines the literature on financial crises in emerging markets and developing economies with that on international migrations by investigating whether the increasingly large flows of workers’ remittances can help reduce the probability of current account reversals. The rationale for this stands in the great stability and low cyclicality of remittances as compared to other private capital flows: these properties, combined with the fact that remittances are cheap inflows of foreign currencies, might reduce the probability that foreign investors suddenly flee out of emerging markets and developing economies and trigger a dramatic current account adjustment. We find that remittances can indeed have such a beneficial effect. In particular, we show that a high level of remittances, as a ratio of GDP, makes the relationship between a decreasing stock of international reserves (over GDP) and a higher probability of current account crises less stringent. The same occurs, though less neatly, for the positive relationship between an increasing stock of external debt (over GDP) and the probability of current account reversals. Our results point also to a threshold effect of remittances: the mechanisms just described are, in fact, much stronger when remittances are above 3 percent of GDP.

Suggested Citation

  • Bugamelli, Matteo & Paterno, Francesco, 2006. "Do workers' remittances reduce the probability of current account reversals?," LSE Research Online Documents on Economics 19872, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:19872
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    References listed on IDEAS

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    More about this item

    Keywords

    current account reversals; workers’ remittances; international reserves; external debt;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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