IMF Staff Papers

, Volume 57, Issue 2, pp 303–325

Emerging Market Business Cycles with Remittance Fluctuations

Authors

  • Ceyhun Bora Durdu
  • Serdar Sayan
Original Article

DOI: 10.1057/imfsp.2009.3

Cite this article as:
Durdu, C. & Sayan, S. IMF Econ Rev (2010) 57: 303. doi:10.1057/imfsp.2009.3

Abstract

This paper analyzes the implications of remittance fluctuations for various macroeconomic variables and sudden stops. The paper employs a quantitative two-sector model of a small open economy with financial frictions calibrated to Mexican and Turkish economies, two major recipients, whose remittance receipts feature opposite cyclical characteristics. We find that remittances dampen business cycles in Mexico, whereas they amplify the cycles in Turkey. Their quantitative effects in the long run, approximated by the stochastic steady state, are mild. In the short run, however, remittances have quantitatively large impacts on the economy, when the economy is borrowing-constrained. This is because agents in the economy cannot adjust their precautionary wealth to sudden tightening in credit, and hence, fluctuations in remittances get magnified through an endogenous debt-deflation mechanism. The findings suggest that procyclical (or countercyclical) remittances can play a significant deepening (or mitigating) role for sudden stops.

Keywords

F41F32E32

Copyright information

© International Monetary Fund 2010