Do Workers' Remittances Reduce the Probability of Current Account Reversals?

Summary This paper tests whether the large, cheap, stable, and low-cyclical flows of workers' remittances reduce the probability of current account reversals in recipient countries. Using a large panel of emerging and developing economies, we find that this is indeed the case: when remittances get above 3% of GDP, the relationship between a decreasing stock of international reserves and a higher probability of current account reversals becomes less stringent. IV estimation proves that the effect of remittances on current account reversals is of a causal nature.