1. INWARD WORKERS’ REMITTANCES AND
REAL EXCHANGE RATES IN SOUTH ASIA,
1980‐2011
Arjuna Mohottala
Molonglo Theatre, Crawford School of Public Policy
November 4, 2013

2. BACKGROUND
 Surge in remittances to developing countries over the past years
 1998: US$ 50 bn
 2012: US$ 406 bn (World Bank estimate)
 Remittances are nearly 3 times the amount of ODA and almost on a par with
FDI flows to developing countries
 Many research focus on short-run socioeconomic impact
 Existing research mostly focus on economic growth, industrialisation and
fiscal sustainability
 There could be macroeconomic effects such as appreciation of the real
exchange rate in response to inward remittances.
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
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3. KEY LITERATURE
López, H, Molina, L & Bussolo, M 2007, ‘Remittances and the Real Exchange
Rate’,World Bank Policy ResearchWorking Paper 4213.
 Focus is on Latin American countries
 Distributed lag model
 Conclude remittances contribute to real exchange rate appreciation
Lartey, EKK, Mandelman, FS & and Acosta, PA 2008, ‘Remittances, exchange
rate regimes, and the Dutch disease: a panel data analysis’, Working Paper
2008-12, Federal Reserve Bank of Atlanta.
 Generalised method of moments estimator
 Period 1990 - 2003
 Dutch disease is stronger in fixed exchange rate regimes
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
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4. RESEARCH QUESTION
Do inward workers’ remittances result in an appreciation of
the real exchange rates in South Asia during 1980-2011?
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
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5. RESEARCH QUESTION
Do inward workers’ remittances result in an appreciation of
the real exchange rates in South Asia during 1980-2011?
 Pre-crisis period (2005-2008) witnessed a notable increase in migrant workers from
South Asia (World Bank)
 South Asia is expected to have received $109 billion in remittances in 2012 (World
Bank)
Table 1 Summary statistics by country: 1980-2011
Country
Bangladesh
India
Nepal
Pakistan
Sri Lanka
Total Remittances (USD mn)
1980
2011
338.67
12,050.62
2,755.69
53,480.00
34.79
4,010.48
2,047.62
12,235.00
151.70
5,144.84
Remittances/GDP
1980
2011
1.9
10.8
1.5
3.4
2.4
22.3
8.6
5.8
3.8
8.7
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
REER appreciation
1980 - 2011 (%)
-19.96%
-25.48%
-13.24%
-47.69%
30.91%
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6. DATA
 Balanced panel data set for the period 1980 - 2011
 The countries included in the research:
 Bangladesh
 India
 Nepal
 Pakistan
 Sri Lanka
 Sources:
 IFS and WDI databases
 Nepal Rastra Bank
 Darvas (2012) for REER index series
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
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7. HOW THE DATA LOOKS
Figure 1: Remittances flows and REER of selected countries
Bangladesh
Pakistan
India
Sri Lanka
Nepal
Remittances growth
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
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8. DETERMINANTS OF REAL EXCHANGE RATE
Table 2 Determinants of real exchange rate
Variable
Remittances
Definition
Growth rate of remittances per capita
Exports
Growth rate of exports per capita
(-)
Imports
Growth rate of imports per capita
(+)
M2 growth
Growth rate of broad money
Annual growth of government consumption
expenditure relative to GDP
Growth rate of the GDP
(-)
Govt. expenditure
GDP growth
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
Expected sign
(+)
(-)
(+)
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9. ESTIMATION
 η is an unobserved country-specific effect
 λ is a time-specific effect
 ε is the error term
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
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10. COMPUTATION OF REER
 where,
is the nominal effective exchange rate of the country
under study

is the nominal bilateral exchange rate

is is the geometrically weighted average of CPI indices
of trading partners
 Darvas (2012) uses time-invariant weights
 Basket of countries representative of foreign trade in 1998-2003
 Base year for this index series is set as 2007
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
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11. TESTS
 Checks for structural breaks in the remittances flows
 Zivot-Andrews unit root test - structural break at an unknown point in time
 Chow Test
1
0
0
-1
0
-2
0
G w ra p r a n m(%
ro th te e n u
)
2
0
Figure 2: Remittances growth rate of selected countries
1980
1984
1988
1992
growth rate of reer
1996
2000
2004
2008
2012
mean growth rate
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
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12. TESTS
 Tests to assess the stationary of the variables
 augmented Dickey-Fuller test
 Dickey-Fuller Generalised Leased Square test
 Phillips-Perron test
 Subsequent to the introduction of the structural break, the variables were
stationary at I(0)
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
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13. TESTS
 Correcting for the endogeneity of remittances
 Instrumental variables
 Conditioning variables
 Estimation technique
 No consensus regarding any of these tools has emerged in the literature on
remittances
 Pablo and Lopez (2008) highlight that longer time horizons may facilitate to
obtain the ceteris paribus effect of trade performance on the growth rate of
REER
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
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14. ESTIMATION RESULTS
Table 3 Determinants of the real exchange rate, estimation results
Model
Fixed-effects
Random-effects
OLS
Variable
Coefficient
S.E.
Coefficient
S.E.
Coefficient
S.E.
lrem_pc
0.075**
0.027
0.159***
0.031
0.075**
0.027
lex_pc
-0.37***
0.049 -0.195***
0.048
-0.37***
0.049
lim_pc
0.182**
0.062
-0.009
0.065
0.182**
0.062
lrem_pc_br
-0.011
0.013
-0.04**
0.012
-0.011
0.013
gdp_gr
0.018**
0.006
0.019**
0.007
0.018**
0.006
gov_ex_gdp
0.031**
0.007
0.014**
0.005
0.031***
0.007
m2_gr
-0.001
0.002
-0.003
0.002
-0.001
0.002
_cons
4.729***
0.144
4.894***
0.122
4.849***
0.126
N
159
159
159
r2
0.2527
0.3361
0.5840
legend: * p<0.05; ** p<0.01; *** p<0.001
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
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15. ESTIMATION RESULTS
Table 4 Country-specific estimation results
Country
Variable
Bangladesh
India
Nepal
Pakistan
Sri Lanka
lrem_pc
-0.179*
-0.046
0.228***
0.209***
0.249**
(S.E.)
(0.074)
(0.065)
(0.064)
(0.063)
(0.1)
0.011
0.025
-0.124
-0.092***
-.016
(0.022)
(0.028)
(0.046)
(0.029)
(0.017)
lrem_pc_br
(S.E.)
legend: * p<0.10; ** p<0.05; *** p<0.01
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
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16. CONCLUSION
 The research looks at a long-term time horizon of 3 decades 1980-2011
 The remittances flows to South Asia will continue to grow
 Estimated results imply that a 1% increase in remittances per capita appreciates the
real exchange rate on average by 0.12% in South Asia over the time horizon
 Developing countries in South Asia should aim to keep the REER close to its
equilibrium level
 reinforces the need to have sound macroeconomic policies
 Country specific results are different
 Data reflects Bangladesh’s REER depreciating on average 0.18% p.a.
 Since 2002, Pakistan’s REER depreciates on average by 0.09% p.a.
 Government expenditure to GDP shows a positive impact - different sign from
what is indicated in literature
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
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17. CONCLUSION ‐ FUTURE RESEARCH
 Include more variables such as FDI , aid and financial flows
 Encompass a Panel IV to mitigate the effects of causation
 Need more micro-level studies for a clear explanation of the obtained result
Arjuna Mohottala - Inward Workers’ Remittances and Real Exchange Rates in South Asia, 1980-2011
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