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Migrant Remittances and Exchange Rate Regimes in the Developing World

by David Andrew Singer. Reading for Tuesday, 22 April 2008.

This article argues that the international financial consequences of immigration exert a strong influence on the choice of exchange rate regimes in the developing world. Over the past two decades, migrant remittances have emerged as a significant source of external finance for developing countries, often exceeding conventional sources of capital such as foreign direct investment and bank lending. Remittances are unlike nearly all other capital flows in that they are stable and move counter cyclically relative to the recipient country’s economy. As a result, they mitigate the costs of forgone domestic monetary policy autonomy and also serve as the “risk-sharing” mechanism required by standard political economy models of currency unions. The observable implication of these arguments is that remittances increase the likelihood that policymakers will adopt fixed exchange rates. An analysis of data on de facto exchange rate regimes and a newly available dataset on remittances for 59 developing countries from 1990 to 2004 provides strong support for these arguments.

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