Crisis and Stability: Examining the Effects of Remittances on the Macroeconomy

Suria Dauod

Advisor: Carlos D Ramirez, PhD, Department of Economics

Committee Members: Lawrence H. White, Garett B. Jones

Buchanan Hall, #D180
April 12, 2023, 03:00 PM to 05:00 PM


Remittances, money sent from migrant workers to families in their home countries, have increased considerably since the 1990s and represent a large source of international capital flows for many developing countries. Generally, remittances are a remarkably stable source of income and are countercyclical to the recipient-country, to compensate for lower economic growth. This dissertation examines the effects of remittances on the macroeconomy of developing countries, and its role in managing risks of crises and promoting growth and stability.

Chapter one considers the role of remittances as a source of stable foreign exchange reserves, and how they can enhance stability in the macroeconomy. I ask the question: can the flow of remittances help to decrease the likelihood of a financial crisis? To evaluate this question, I identify a financial crisis as a banking and currency crisis and estimate the effect of remittance flows on each crisis using logit and probit techniques. I find robust evidence for a sample of remittance-recipient countries that remittances have a statistically significant effect on financial crises. By increasing the foreign exchange reserves of a central bank, remittances improve the capacity of the central bank to manage the risk of a financial crisis. Thereby, remittances decrease the likelihood of a banking and currency crisis occurring.

The academic literature has devoted much attention to discerning the institutions and policies affecting economic growth. Chapter two considers the nature of this problem and develops a case study to highlight the role remittances can play in boosting growth. This chapter, co-authored with Carlos D. Ramirez and published in Applied Economics Letters (2022), examines the effects of remittances on output for Lebanon, a case with a unique setting: remittances to Lebanon are primarily from workers located in oil-producing Gulf States and thus influenced by oil prices. This setting enables us to estimate a structural vector autoregression (VAR) model using the price of oil as an instrument. Our results suggest that the adoption of policies that facilitate remittance flows should be encouraged, as they likely stimulate economic growth.

Chapter three investigates the impact of remittance flows on monetary policy decisions in a small-open economy – Lebanon. Lebanon maintains a fixed exchange rate, with its currency pegged to the US dollar, and remittances comprise approximately a quarter of its gross domestic product. I study whether the policies of the Lebanese central bank are endogenous to remittance flows. To address this question, I perform a VAR analysis and evaluate orthogonalized impulse response functions of remittances on Lebanon's money supply (M1). The results indicate that there is a causal relationship between the money supply and remittance inflows in Lebanon: as remittance levels increase, M1 levels decrease. The findings suggest that monetary policy in Lebanon is endogenous, and remittances influence the decisions of the central bank.