Remittance Inflows and State-Dependent Monetary Policy Transmission in Developing Countries
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Abstract
Remittance inflows from overseas workers are an important source of for-
eign funding for developing and emerging economies. The literature is in-
conclusive about the cyclical nature of remittance inflows. To the extent remittances are procyclical they pose a challenge to monetary policy: a tightening of policy will be less effective if at the same time remittances increase strongly. The same is true for a policy easing under exceptionally weak remittance inflows. This paper estimates a series of nonlinear (smooth-transition) local projections to study the effectiveness of monetary policy under different remittance inflows regimes. The model is able to provide state-dependent
impulse response functions. We show that for Kenya, Mexico, Colombia and
the Philippines monetary policy indeed has a smaller domestic effect under
strong inflows of remittances. These results have important implications for
the design of inflation targeting in developing countries.
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This item has been published with the following license: In Copyright