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Michael T. Gapen, Mr. Thomas F. Cosimano, and Mr. Ralph Chami
This paper uses a stochastic dynamic general equilibrium model to investigate the influence of countercyclical remittances on the conduct of fiscal and monetary policy and trace their effects on real and nominal variables in a business cycle setting. We show that remittances raise disposable income and consumption, and insure against income shocks, thereby raising household welfare. However, remittances increase the correlation between labor and output, thereby producing a more volatile business cycle and increasing output and labor market risk. Optimal monetary policy in the presence of remittances deviates from the Friedman rule, highlighting the need for independent government policy instruments.
Connel Fullenkamp, Mr. Thomas F. Cosimano, Michael T. Gapen, Mr. Ralph Chami, Mr. Peter J Montiel, and Mr. Adolfo Barajas

involving the use of cash. Given the preponderance of evidence supporting the altruistic motive for remitting, including the evidence presented in Chapter 4 , and the treatment of these flows in balance of payments accounting as discussed in Chapter 2 , the representative household receives remittances, which are exogenously specified as countercyclical real income transfers that augment the income the household receives from production. 2 The countercyclical remittance function used in the model results in increased real transfers to the household when domestic

Ahmat Jidoud
This paper investigates the channels through which remittances affect macroeconomic volatility in African countries using a dynamic stochastic general equilibrium (DSGE) model augmented with financial frictions. Empirical results indicate that remittances—as a share of GDP—have a significant smoothing impact on output volatility but their impact on consumption volatility is somewhat small. Furthermore, remittances are found to absorb a substantial amount of GDP shocks in these countries. An investigation of the theoretical channels shows that the stabilization impact of remittances essentially hinges on two channels: (i) the size of the negative wealth effect on labor supply induced by remittances and, (ii) the strength of financial frictions and the ability of remittances to alleviate these frictions.
Michael T. Gapen, Mr. Thomas F. Cosimano, and Mr. Ralph Chami

market through higher wage and labor supply volatility. Thus, while Chami, Fullenkamp, and Jahjah ( 2003 , 2005 ) use asymmetric information assumptions to argue that remittances increase labor market risk, we find this to be the case in a model with flexible prices and full information. Offsetting the increase in business cycle volatility is the finding that countercyclical remittances provide consumption insurance against income shocks. As the remittances-to-income ratio rises, model simulations indicate that volatility of household consumption generally remains

Ceyhun Bora Durdu and Mr. Serdar Sayan

-standard-deviation income shock magnifies the decline in tradable consumption by 2 percent and the reversal in current account-GDP ratio by 3 percentage points. In the Mexican case, a one-standard-deviation positive remittance shock that follows the negative income shock smoothes the decline in tradable consumption by 1.4 percent and decreases the reversal in the current account-GDP ratio by 2 percentage points. These results suggest that remittances can have significant amplifying, in the case of procyclical remittances, or smoothing, in the case of countercyclical remittances, effects

¼ percent in the first nine months of 2020 globally), which could be attributed to U.S. policies to support household incomes in response to the economic contraction. In general, stronger host country conditions increase outward remittances ( Faini, 1994 ; Higgins and others, 2004 ). Remittances from Spain have also been resilient. Regarding pull factors, Colombia’s relatively sharp economic contraction in 2020 could have sparked a countercyclical remittances inflow response. Considering a longer time horizon, Colombia’s relatively modest growth since the 2014 oil

Mr. Adolfo Barajas, Mr. Ralph Chami, Mr. Christian H Ebeke, and Mr. Sampawende J Tapsoba
This paper shows that remittance flows significantly increase the business cycle synchronization between remittance-recipient countries and the rest of the world. Using both aggregate and bilateral remittances data in a panel data setting, the study demonstrates that this effect is robust and causal. Moreover, the econometric analysis reveals that remittance flows are more effective in channeling economic downturns than upswings from the sending countries to remittance-receiving economies. The analysis suggests that measures of openness and spillovers could be enhanced by accounting for the role of the remittances channel.
Mr. Adolfo Barajas, Mr. Ralph Chami, Mr. Christian H Ebeke, and Mr. Sampawende J Tapsoba

economies (columns [1] of Tables 6 and 7 ). Results also point out a positive and significant growth’s spillover effect from the sending into the receiving economies (the elasticity of domestic income with respect to sending countries is positive and significant). In column [2] of Tables 6 and 7 , the results highlight a positive and significant correlation between remittances and income in the sending countries and a negative correlation between remittances and recipient country income, supporting the hypothesis of countercyclical remittance flows. The IV results

Ms. Dalia S Hakura, Mr. Ralph Chami, and Mr. Peter J Montiel
Remittance flows appear to be falling worldwide for the first time in decades as a result of the ongoing financial turmoil. It is suspected that the drop in remittance income into developing and emerging markets will have a destabilizing effect on these economies. The paper estimates the impact of remittances on output stability for countries that are dependent on these income flows. Using a sample of 70 countries, including 16 advanced economies and 54 developing countries, we find robust evidence that remittances have a negative effect on output growth volatility of recipient countries. This result supports the notion that remittance flows are a stabilizing influence on output. Thus, the fall in remittances precipitated by the ongoing global financial crisis could potentially increase output variability in recipient countries. This would present a hard challenge for governments in those countries already suffering from the crisis: they must resort to an already stressed and limited set of policy instruments, such as fiscal policy, to counter the resulting adverse economic and social impacts of lower remittances.
Ms. Dalia S Hakura, Mr. Ralph Chami, and Mr. Peter J Montiel

. However, there are two caveats to this argument. First, to the extent that fluctuations in growth are driven by labor-supply responses to technology shocks, countercyclical remittance flows may actually tend to amplify those responses – for example, if a positive technology shock elicits an increase in labor supply because the real wage is temporarily high, and if remittance flows contract in response to the resulting increase in domestic income, the negative income effect associated with the contraction in remittances may reduce household demand for leisure, thereby