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A small open economy DSGE model with workers' remittances

Muhammad Rehman (State Bank of Pakistan, Karachi, Pakistan)
Sajawal Khan (State Bank of Pakistan, Karachi, Pakistan)
Zafar Hayat (Department of Research, State Bank of Pakistan, Karachi, Pakistan) (Senior Economist, IMF, Islamabad, Pakistan)
Faruk Balli (School of Economics and Finance, Massey University, Albany, New Zealand) (Higher School of Economics and Business, Al-Farabi Kazakh National University, Almaty, Kazakhstan)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 4 May 2020

Issue publication date: 8 October 2020

Abstract

Purpose

In this paper, the authors develop and estimate a small open economy dynamic stochastic general equilibrium (DSGE) model with an enriched micro-founded specification to account for foreign remittances, an important source that helps bridge the trade gap in many developing and emerging market economies.

Design/methodology/approach

Although the authors’ specification provides a general frame for the analysis of the role of workers' remittances, they motivate and calibrate the model with specific focus on Pakistan, where most of the trade deficit is met through the remittance channel.

Findings

The results indicate that a negative shock to workers' remittances hampers real growth via decreased consumption and imported investment goods, while it builds pressure on exchange rate and hence worsens current account balance. These results indicate that too much dependence on workers' remittances to help meet foreign exchange deficits may potentially leave the economy in doldrums in case sizable negative shocks occur to the flow of foreign remittances.

Originality/value

The authors develop and estimate a small open economy DSGE model with an enriched micro-founded specification to account for foreign remittances, an important source that helps bridge the trade gap in many developing and emerging market economies.

Keywords

Citation

Rehman, M., Khan, S., Hayat, Z. and Balli, F. (2020), "A small open economy DSGE model with workers' remittances", Journal of Economic Studies, Vol. 47 No. 6, pp. 1339-1361. https://doi.org/10.1108/JES-01-2019-0009

Publisher

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Emerald Publishing Limited

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