Dynamic multiplier effects of remittances in developing countries

Purpose – The purpose of this paper is to simulate the indirect and direct effects of remittances in developing countries. Design/methodology/approach – The paper estimates a dynamic macroeconomic model and estimates the short-run and long-run dynamic multiplier effects of hypothetical temporary changes in remittances, as well as simulates the permanent effects of observed remittances. Findings – The results indicate positive multiplier effects in general, and they also reveal a substantial variability across income categories and regions. The results indicate that low-income economies are more inclined to spend their incomes on consumption and investments than middle-income economies and, therefore, have a higher short-run potential gain from receiving remittances. Low-income economies typically reside in Sub-Saharan Africa, whereas middle-income economies are mainly found in East Europe, Latin America and North Africa and the Middle East. However, actual gains from remittances are highest in lower middle-income economies because these countries receive more remittances. Generally, the short-run effects are higher than the long-run effects due to a sustained dependence of imported goods and services. Research limitations/implications – The paper analyzes the effects of remittances on components in aggregate demand. Practical implications – The results support the World Bank's current policy recommendation that remittances should be promoted. Originality/value – The paper corrects the algebraic solution for dynamic multiplier effects in Glytsos's work, written in 2005, and estimates the model for a macroeconomic panel containing 115 developing countries. The paper considers the effects of the net flows of remittances rather than of inflows only.