Remittances are the fastest growing source of foreign exchange earnings for developing countries. The purpose of this paper is to assess the impact of remittances on economic volatility of the receiving country.
A panel of 95 countries over the period 1970‐2005 is employed in the analysis. To assess the impact of remittances on volatility a multivariate model is estimated using a panel fixed effects approach with cross‐section weights.
The study reports that remittances can play a key role in mitigating the effect of adverse output shocks but exert no significant influence on consumption and investment volatility. Moreover, important differential impacts exist across the various country groupings.
Countries that are dependent on remittances may have to monitor and forecast future remittance flows and take these projections into account when making changes to either their monetary or fiscal policy stance.
The findings provided in this paper should be of use to policymakers in developing countries.
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