Migrant Remittances and Exchange Rate Regimes in the Developing World

Migrant Remittances and Exchange Rate Regimes in the Developing World

D.A. Singer

This article tries to find out the influence of remittances on the exchange rate. The author states that the remittances are likely to influence the policymakers to imply fixed exchange rate in countries with a high ratio of remittances. He tested this hypothesis by using time-series cross-sectional data set of 74 developing countries with their de facto exchange rate. Firstly, is important to stress out that that exchange rate regime is something which is chosen by the government as a respond to macroeconomic condition or political pressure. It is not an easy task as the government should choose between fixed and floating exchange rate regime. The benefits of the fixed rate decrease the risk of cross borders transaction. The floating one gives the government the ability to adapt monetary policy regards the domestic situation. There are several reasons why Singer tested the causal effect of remittances and fixed exchange rate policy, compared to different traditional capital flows. They are stable and unrequited, they cannot be withdrawn, liquidated, or repatriated, countercyclical. On the other side, FDI or bank lending or portfolio investments are not stable in countries with a fixed exchange rate. This is due to the openness of the financial openness of the countries, which makes them less attractive for the capital flow. However, it is arguable whether this measurement of such a variable is sufficient.

Frankly, I have been satisfied with this article as it has brought the contribution in explaining the phenomena between remittances and exchange rate policy. Regards the empirical testing, I have appreciated that Singer has used the de facto exchange rate instead of the de juro one. So, the results of his hypothesis are more accurate. However, as he admits, the data from International Monetary Fund cannot be so reliable. Firstly, many transfers of remittances are sent through unofficial channels and the exact number of the transactions might not be precise. Secondly, he tested the statistical data from 1983-2004. However, the appropriate measure of remittances has started after 1990, thus the data prior 1990 might not be accurate as well.

Remittances and Social Spending

Doyle

In this article, authors try to find the relationship between the remittances and social spending in Latin America. He claims that remittances will increase a recipient’s income and thus decrease his economic insecurity as remittances are considered a stable financial flow. This will have the spillover effect on recipient’s choice during the election. Hence, as the recipient feels more economically secure, he might not vote for the party which advocate bigger social spending and general reduction on welfare by the government.  To confirm his hypothesis, Doyle has used error correction model cross-national, time-series (1990-2009) data set regards the social spending in 18 countries.