Inward workers' remittances and real exchange rates in South Asia, 1980 - 2011

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Inward workers' remittances and real exchange rates in South Asia, 1980 - 2011

  1. 1. INWARD WORKERS’ REMITTANCES AND REAL EXCHANGE RATES IN SOUTH ASIA,  1980‐2011 Arjuna Mohottala Molonglo Theatre, Crawford School of Public Policy November 4, 2013
  2. 2. BACKGROUND  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 with FDI flows to developing countries  Many research focus on short-run socioeconomic impact  Existing research mostly focus on economic growth, industrialisation and fiscal sustainability  There could be macroeconomic effects such as appreciation of the real exchange rate in response to inward remittances. Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 2
  3. 3. KEY LITERATURE López, H, Molina, L & Bussolo, M 2007, ‘Remittances and the Real Exchange Rate’,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, exchange rate regimes, and the Dutch disease: a panel data analysis’, Working Paper 2008-12, 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 3
  4. 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 4
  5. 5. RESEARCH QUESTION Do inward workers’ remittances result in an appreciation of the real exchange rates in South Asia during 1980-2011?  Pre-crisis period (2005-2008) witnessed a notable increase in migrant workers from South Asia (World Bank)  South Asia is expected to have received $109 billion in remittances in 2012 (World Bank) Table 1 Summary statistics by country: 1980-2011 Country Bangladesh India Nepal Pakistan Sri Lanka Total Remittances (USD mn) 1980 2011 338.67 12,050.62 2,755.69 53,480.00 34.79 4,010.48 2,047.62 12,235.00 151.70 5,144.84 Remittances/GDP 1980 2011 1.9 10.8 1.5 3.4 2.4 22.3 8.6 5.8 3.8 8.7 Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 REER appreciation 1980 - 2011 (%) -19.96% -25.48% -13.24% -47.69% 30.91% 5
  6. 6. DATA  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 Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 6
  7. 7. HOW THE DATA LOOKS Figure 1: Remittances flows and REER of selected countries Bangladesh Pakistan India Sri Lanka Nepal Remittances growth Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 7
  8. 8. DETERMINANTS OF REAL EXCHANGE RATE Table 2 Determinants of real exchange rate Variable Remittances Definition 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 Annual growth of government consumption expenditure relative to GDP Growth rate of the GDP (-) Govt. expenditure GDP growth Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 Expected sign (+) (-) (+) 8
  9. 9. ESTIMATION  η is an unobserved country-specific effect  λ is a time-specific effect  ε is the error term Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 9
  10. 10. COMPUTATION OF REER  where, is the nominal effective exchange rate of the country under study  is the nominal bilateral exchange rate  is is the geometrically weighted average of CPI indices of 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 Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 10
  11. 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 1 0 0 -1 0 -2 0 G w ra p r a n m(% ro th te e n u ) 2 0 Figure 2: Remittances growth rate of selected countries 1980 1984 1988 1992 growth rate of reer 1996 2000 2004 2008 2012 mean growth rate Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 11
  12. 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 were stationary at I(0) Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 12
  13. 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 on remittances  Pablo and Lopez (2008) highlight that longer time horizons may facilitate to obtain the ceteris paribus effect of trade performance on the growth rate of REER Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 13
  14. 14. ESTIMATION RESULTS Table 3 Determinants of the real exchange rate, estimation results Model Fixed-effects Random-effects OLS Variable Coefficient S.E. Coefficient S.E. Coefficient S.E. lrem_pc 0.075** 0.027 0.159*** 0.031 0.075** 0.027 lex_pc -0.37*** 0.049 -0.195*** 0.048 -0.37*** 0.049 lim_pc 0.182** 0.062 -0.009 0.065 0.182** 0.062 lrem_pc_br -0.011 0.013 -0.04** 0.012 -0.011 0.013 gdp_gr 0.018** 0.006 0.019** 0.007 0.018** 0.006 gov_ex_gdp 0.031** 0.007 0.014** 0.005 0.031*** 0.007 m2_gr -0.001 0.002 -0.003 0.002 -0.001 0.002 _cons 4.729*** 0.144 4.894*** 0.122 4.849*** 0.126 N 159 159 159 r2 0.2527 0.3361 0.5840 legend: * p<0.05; ** p<0.01; *** p<0.001 Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 14
  15. 15. ESTIMATION RESULTS Table 4 Country-specific estimation results Country Variable Bangladesh India Nepal Pakistan Sri Lanka lrem_pc -0.179* -0.046 0.228*** 0.209*** 0.249** (S.E.) (0.074) (0.065) (0.064) (0.063) (0.1) 0.011 0.025 -0.124 -0.092*** -.016 (0.022) (0.028) (0.046) (0.029) (0.017) lrem_pc_br (S.E.) legend: * p<0.10; ** p<0.05; *** p<0.01 Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 15
  16. 16. CONCLUSION  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 the real 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 its equilibrium 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 from what is indicated in literature Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 16
  17. 17. CONCLUSION ‐ FUTURE RESEARCH  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 Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011 17

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