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Migrant Remittances and Exchange Rate Regimes in the Developing World

  • DAVID ANDREW SINGER (a1)
Abstract

This article argues that the international financial consequences of immigration exert a substantial influence on the choice of exchange rate regimes in the developing world. Over the past two decades, migrant remittances have emerged as a significant source of external finance for developing countries, often exceeding conventional sources of capital such as foreign direct investment and bank lending. Remittances are unlike nearly all other capital flows in that they are stable and move countercyclically relative to the recipient country's economy. As a result, they mitigate the costs of forgone domestic monetary policy autonomy and also serve as an international risk-sharing mechanism for developing countries. The observable implication of these arguments is that remittances increase the likelihood that policy makers adopt fixed exchange rates. An analysis of data on de facto exchange rate regimes and a newly available data set on remittances for up to 74 developing countries from 1982 to 2006 provides strong support for these arguments. The results are robust to instrumental variable analysis and the inclusion of multiple economic and political variables.

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Corresponding author
David Andrew Singer is Assistant Professor, Department of Political Science, Massachusetts Institute of Technology, 77 Massachusetts Avenue, Cambridge, MA 02139 (dasinger@mit.edu).
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Pablo A. Acosta , Emmanuel K. K. Lartey , and Federico S. Mandelman . 2009. “Remittances and the Dutch Disease.” Working Paper 2007–8a. Federal Reserve Bank of Atlanta.

David H. Bearce 2007. Monetary Divergence: Domestic Policy Autonomy in the Post-Bretton Woods Era. Ann Arbor: University of Michigan Press.

William Bernhard , and David Leblang . 2006. Democratic Processes and Asset Markets. New York: Cambridge University Press.

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Layna Mosley . 2003. Global Capital and National Governments. Cambridge: Cambridge University Press.

Beth Simmons . 1994. Who Adjusts? Domestic Sources of Foreign Economic Policy during the Interwar Years. Princeton, NJ: Princeton University Press.

Dean Yang , and Hwajung Choi . 2007. “Are Remittances Insurance? Evidence from Rainfall Shocks in the Philippines.” The World Bank Economic Review 21 (2): 219–48.

German Zarate-Hoyos . 2004. “Consumption and Remittances in Migrant Households: Toward a Productive Use of Remittances.” Contemporary Economic Policy 22 (4): 555–65.

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American Political Science Review
  • ISSN: 0003-0554
  • EISSN: 1537-5943
  • URL: /core/journals/american-political-science-review
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