The Macroeconomic Consequences of Remittances

Abstract: We study the impact of remittances on a small open economy with a stochastic limited participation model with cash in advance constraints and costly adjustment of cash holdings. We examine the impact of remittances on the steady state, as well as on the dynamics of the main macroeconomic aggregates. We find that a positive remittances shock forces the exchange rate to depreciate and lowers both output and the interest rate in the period of the shock, irrespective of the proportion of remittances as a percentage of GDP in the economy, but increase output in the subsequent periods, while consumption rises on impact