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.