Remittances and the Dutch Disease: Evidence from Cointegration and Error-Correction Modeling

Artatrana Ratha, St. Cloud State University

Abstract

Remittances have grown in size and importance. They are also among the most stable inflows of scarce foreign exchange for the developing world. While such inflows can boost economic growth, they may also cause domestic currency to appreciate and hurt exports – a side effect commonly referred to as the Dutch disease. This paper adds to this literature by applying the bounds-testing approach to cointegration and error-modeling (Pesaran, et al., 2001) on a reduced form model linking remittance inflows to real exchange rate in some of the major remittances destinations in absolute terms (viz. China, India, Mexico, and Philippines) and in relative terms (viz. Lesotho) over the last 3 decades.