Abstract
Increasing remittance flows to developing countries continue to stimulate analytical research. We apply a model, based on the “permanent income hypothesis”, to estimate the impact of remittances on consumption in eleven Latin American and Caribbean countries for the period of 2003–2013. The independent variables are: (a) real per capita national income (exclusive of remittances), the measure of “permanent income”, (b) remittances, the measure of “transitory income”, and (c) real interest rate, the indicator of intertemporal consumption substitution. The coefficient of remittances measures the consumption-augmentation and saving effects, while the correlation between remittances and per capita income indicates the consumption-smoothing effects. The results, based on the panel data methodology, indicate: (a) both permanent income and transitory income positively impact consumption, (b) consumption responds higher to permanent income than to transitory income, (c) transitory income has augmenting, stabilizing and countercyclical effects on consumption, and (d) the significant interest rate indicates the ability of recipients to make intertemporal consumption substitution. Evidence of significant “country effect” attests to heterogeneity among countries. Strategies to stabilize remittance flows and to leverage them for financial, economic and social development should be important policy considerations.
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Notes
Migrant remittances are defined as the sum of workers’ remittances, compensation of employees, and migrants’ transfers. Workers’ remittances, as defined by the International Monetary Fund (IMF) in the Balance of Payments Manual, 6th edition (IMF 2010), are current private transfers from migrant workers who are considered residents of the host country to recipients in the workers’ country of origin.
The Multilateral Investment Fund (2006) also lists the following potential impact of remittances on the regional economy of Latin America and Caribbean; (i) insurance investments, (ii) banking investments, (iii) housing investments, (iv) educational investments, (v) microfinance institution loans, (vi) direct payments, and (vii) agriculture credits.
They also sent less money per transfer as noted by the Inter-American Development Bank (2009). Remittances from Spain showed average transaction value that were 6% lower than 2008.
The PIH postulates the following: (i) non-correlation between the transitory and permanent component of income, (ii) non-correlation between transitory consumption and permanent consumption, (iii) non-correlation between transitory consumption and transitory income.
There are several factors that affect the amount of remittance flows: (i) economic conditions in migrant destination countries (host countries), (ii) migrant population and migrant unemployment rate in host countries, (iii) the average wage rate for migrant workers in host countries, (iv) the level of family needs in recipient countries, (v) the economic conditions in recipient countries which affect needs and possibility for out migration, and (vi) remittance transfer costs.
Goldberg and Levi (2008) note that costs can be very high as we found in out from existing studies ranging from 10% to 12% + depending on the amount transferred and the transfer agent. The Inter-American Development Bank (2009), dealing with remittances from the US to Latin America showed that the cost of remitting funds had dropped sharply to US$16.32 for a US$200 transfer in the summer of 2002, just over half of what it was three years earlier.
Wald test and F test. If the intercepts are equal for all countries, then there are no fixed effect, that is no individual heterogeneity to be captured by these effects. We can test for the equality of all tests using the Wald Test. If the Null Hypothesis of equal intercepts is rejected, there are fixed effects that is individual heterogeneity can be captured by these effects.
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I am very grateful to an anonymous reviewer for helpful comments/suggestions on earlier drafts of this paper. All errors are mine.
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Ramcharran, H. Analyzing the impact of workers’ remittances on household consumption in Latin American and Caribbean Countries. J Econ Finan 44, 59–77 (2020). https://doi.org/10.1007/s12197-019-9468-z
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DOI: https://doi.org/10.1007/s12197-019-9468-z