The Impact of Remittance on the Housing Market in Emerging Economies

Abstract. Remittances are transfers of money by foreign workers to their home countries. Money sent home by migrants constitutes the second largest financial inflow to many developing countries. About 45 percent of remittance-receiving households use this income for asset accumulation such as property. Therefore, an increase in remittances determines a rise in household incomes and consequently an increase in consumption of housing services. The economy should respond to the increasing housing demand with more investment and productivity growth, with strong impact in terms of business cycle. The aim of this paper is to describe the implications of remittance fluctuations for various macroeconomic variables and in particular for the housing market, as a resource of asset reallocation. The paper employs a DSGE model with financial frictions, with large quantitative impacts when the economy is borrowing constrained. The development of flexible credit system makes easier the possibility to send money back home and the facility to ask for a mortgage loan. Therefore, a more developed credit and mortgage system amplifies the impact of remittance on housing. In addition, remittances can make up a large part of a down-payment. Households that receive remittances can access formal financing, if they are able to document their total income, including remittances, to acquire a house (expanding the financial frontier)