Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/155650
Authors: 
Machasio, Immaculate
Tillmann, Peter
Year of Publication: 
2016
Series/Report no.: 
Joint Discussion Paper Series in Economics 38-2016
Abstract: 
Remittance inflows from overseas workers are an important source of foreign funding for developing and emerging economies. The literature is in- conclusive about the cyclical nature of remittance inflows. To the extent remittances are procyclical they pose a challenge to monetary policy: a tightening of policy will be less effective if at the same time remittances increase strongly. The same is true for a policy easing under exceptionally weak remittance inflows. This paper estimates a series of nonlinear (smooth-transition) local projections to study the effectiveness of monetary policy under different remittance inflows regimes. The model is able to provide state-dependent impulse response functions. We show that for Kenya, Mexico, Colombia and the Philippines monetary policy indeed has a smaller domestic effect under strong inflows of remittances. These results have important implications for the design of inflation targeting in developing countries.
Subjects: 
remittance inflows
monetary policy
inflation targeting
smooth-transition model
local projections
JEL: 
E52
E32
O16
Document Type: 
Working Paper

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