How do remittances affect the us economy

The use of resources for investment can yield consumption or returns depending of the level of liquidity of investments liquid or oriented to capital formation. The results showed that economic growth will be faster when remittances are larger than the capital stock per entrepreneur and when the economy is poorer. Therefore, from the theoretical point of view, remittances potentially could have positive impacts on economic growth, depending on the use of the financial flows and the degree of development of the financial system.

The empirical evidence of previous studies of the impact of remittances on economic growth has shown diverse results. From the macroeconomic perspective, remittances are related to the magnitude of the effect of foreign exchange on the balance of payments and the allocation of these financial resources between consumption and investment, which have short and long term effects on economic growth and income distribution.

Rempell and Lodbell and Stark and used a Keynesian approach that considered that the income multiplier captures the effect of remittances on effective demand in the short run. The results of these types of studies have shown that remittances provide an important positive effect on the GDP and the marginal propensity to import.

On the other hand, the long term effect of remittances on economic growth is related to the productivity of labor, human capital formation Hanson and Woodruff, and entrepreneurial activity Woodruff and Zenteno, Remittances are also associated with entrepreneurial skills and the level of income of the household members that receive remittances, which could limit the impact of remittances on human capital formation and consumption Chami et al.

As mentioned before, the impact of remittances on growth also depends on the level of development of the financial markets of the receiving countries. Giuliano and Ruiz-Arranz developed an econometric model for countries for the period , including measures of financial development such as the liquid liabilities divided by GDP intermediation , currency deposits to GDP savings , claims of private sector to GDP consumption , and credit to GDP.

OLS and GMM regressions were estimated and the results showed that remittances have become a substitute for underdeveloped financial markets and have contributed to reducing the effects of credit constraints thus encouraging investment in segments of the population.

Remittances can also negatively impact economic growth because they could cause an appreciation in the real exchange rate and that could jeopardize the expansion of the tradable sector, generating the so-called Dutch disease. Acosta, Lartey, and Mandelman estimated a general equilibrium model for a small open economy such as El Salvador.

Using a Bayesian-VAR estimation, they found that the rise of remittances increases household incomes and, consequently, the consumption of non-tradable goods. Chami, Fullenkamp, and Jahjah estimated panel regressions for 83 countries to evaluate the impact of investment, inflation, net capital flows and remittances on GDP.

The showed results positive effects of capital flows, but the variable remittances to GDP was not significant or negatively correlated. It has been argued that the effects of remittances on economic growth are both positive and negative, and in some cases can offset each other Rao and Hassan, As a consequence, remittances do not have important an impact on the long run economic growth; although, in the short and medium run, it is possible to find positive temporary effects, without affecting the rates of growth of the economy.

Glytsos , based on a Keynesian model, estimated the effect of remittances on economic growth. The econometric results of the two stages least squares model applied, did not exhibit a clear effect of remittances on economic growth. For some of the five economies analyzed remittances encouraged growth and for others, they exacerbated recessionary economic behavior.

Additional papers have included both the effect of financial market development and remittances as factors that increase the financial intermediation and reduce financial constraints, therefore promoting economic growth.

Mundaca analyzed the impact of remittances on 25 Latin American economies classified in four groups for the period By including variables expressing the degree of development of the financial system, such as domestic credit from banks and fixed capital formation per capita, the author estimated an empirical model based on a First-Difference Generalized Method of Moments GMM for panel data.

The results of the estimations indicated that remittances have a positive effect on economic growth, particularly if they are oriented to capital investment through the banking system. Furthermore, if the magnitude of remittances is large when compared to the average capital stock, the impact of remittances on growth would be higher. Ramirez and Sharma undertook a unit root and panel cointegration tests and a Fully Modified Least Squares estimation to study the impact of remittances on the economic growth of a group of Latin American and Caribbean economies.

The results showed that for upper and lower income countries, remittances had a positive and significant impact on per-capita GDP growth, suggesting that they can be used as a substitute for financial markets. In addition to the link between remittances and the financial markets, some authors have stressed the importance of remittances and institutions Catrinescu, Leon-Ledesma and Piracha, According to the authors, remittances could have positive effects on growth; however, they can also have negative impacts due to the possibility of generating the Dutch disease and because they can postpone the implementation of policies required for promoting economic growth and development in the receiving country.

Meyer D. In order to observe the impact of remittances on economic growth, the authors used a panel data model for six eastern European countries, where remittances are an important source of foreign exchange, during the period The variables included in the model are the per capita GDP growth, workers remittances, gross fixed capital formation, consumption expenditure, trade and debt, all as a percentage of GDP.

The results indicated that a higher level of remittances leads to a larger impact on economic growth. Ramirez and Sharma H. The results showed that the remittances variable co-integrated with the variable of economic growth exhibited positive effects on economic growth for two groups of countries, particularly when financial development is present.

In addition, an empirical analysis of the impact of remittances on economic growth used time series econometric models Tahir, Khan and Moshadi, The paper studied the economy of Pakistan for the period and included the GDP as the dependent variable and remittances, foreign direct investment and imports as explanatory variables. The times series model used was an autoregressive distributed lag model ARDL which could be very useful for estimating models with variables with different orders of cointegration and also provides a long-run relationship among the variables.

The results of the estimations exhibited a positive relationship between remittances and foreign direct investment and economic growth. The results cannot be generalized because Pakistan relies heavily on remittances and foreign direct investment. In the case of Mexico, a number of investigations have focused on studying whether inflows of remittances exert significant effects on the economic performance of the receiving Mexican regions.

Subsequently, Valdivia and Lozano developed an empirical analysis to investigate the effects of migrant remittances on regional economic growth, in this instance by explicitly accounting for spatial dependence among Mexican regions. While successfully modelling the spatial interaction, the authors found statistically non-significant effects and concluded that remittances may not act as a countercyclical force in low-income states. It can be concluded that the empirical investigations regarding the effect of remittances on economic growth, although inconclusive, have presented results indicating the existence of positive effects of remittances on economic growth.

Particularly, in economies with a somewhat developed financial system that can support the allocation of financial resources, remittances have shown a positive impact on growth.

In the case of Mexico, the empirical literature has indicated the importance of explicitly accounting for spatial dependence, but as the reviewed international literature on remittances and growth suggests the importance of identifying short and long run effects, hence it is crucial to implement a methodology capable of accounting for this objective. Therefore, the analysis of remittances and the financial system at the regional level is relevant to further investigate possible effects of remittances on Mexican economic activity at the state level and the possible presence of interaction effects along both spatial and time dimensions.

We investigate the impact of regional inflow-remittances on state-level economic activity trough a dynamic space-time panel data model. These impacts can be accounted due to the presence of both time and spatial lags capturing time and spatial dependence respectively, and a cross-product term that accounts for spatial and time diffusion effects Debarsy, Ertur and LeSage, We follow Parent and LeSage and Parent and Lesage who propose a framework to model space-time dependence based on space and time filters; in particular, the authors establish a dynamic space-time panel data model as in 1 :.

In addition, Parent and LeSage suggest modeling heterogeneity throughout random effects. Some authors propose to previously eliminate fixed effects to obtain consistent estimates Lee, L. In this regard, Hsiao observes that random effects provide more efficient estimates, thus grounding support for use of random effects. Both random effects and disturbances are assumed uncorrelated. In modeling spatial and time dependence, Parent and LeSage propose applying a space-time filter as in 2 :.

We follow Parent and LeSage in applying the NTXNT space-time filter in matrix Q to expression 1 , leads to equation 3 where the first period observations are conditional:. From the inverse of Q it is possible to calculate C and B -1 to obtain the cumulative impact from a permanent change in the r the explanatory variable at time t. In particular, the main diagonal elements sums for time horizon T represent own-region impacts from both time and spatial dependence, while the sum of off-diagonal elements represent both spillovers and diffusion effects arising from cross-partial contemporaneous and different time derivatives, respectively.

We propose to estimate the following dynamic space-time panel model as expressed in 4 :. Additionally, the log of remittances REM it , CRED i,t , and FDI i,t represents factors that may influence economic activity through acting as a possible economic performance-enhancing financing channel.

Similarly, foreign direct investment for each state was measured in logs of the amount of FDI inflows in thousands of dollars and collected from INEGI.

All variables were subjected to log transformation for ease of interpreting impacts as elasticities. As the peso appreciates, goods produced in Mexico get more expensive internationally, and by comparison, goods produced in America get cheaper. In short, if you're worried about America competing with Mexico for manufacturing jobs, remittances help rather than hurt. Donald Trump outlines plan to get Mexico to pay for border wall.

To be clear, the size of this exchange rate effect is probably small, given the relatively modest size of remittances in the American economy, but it's still important to highlight the issue in part to counter the idea that sending money to Mexico must be bad for American firms.

And of course, if you have any concern for the welfare of poor people in developing countries, many of those families depend on money from abroad for basics like food and school supplies. Research from Mexico and the Philippines has shown that remittances not only help households cover costs, they spur investment in microenterprises and help reduce child labor.

So far, the presidential campaign has been full of economic arguments that assume we live in a zero-sum world, where any trade agreement or immigration policy that benefits another country hurts America. Yet the real world is a world of mutual gains from trade and integration -- and even from the simple act of sending money overseas. Follow CNNOpinion. Join us on Facebook. Similarly, the decision to use remittance receipts for consumption or investment might depend in part on their regularity and predictability.

Households that receive remittances on a predictable basis will be better able to coordinate their day-to-day expenditure and consumption needs with the receipt of remittances. In contrast, households that receive remittances on an unpredictable basis are more likely to view the inflows as nonpermanent and, therefore, are less likely to include them in their consumption planning. As a result, they might have a greater tendency to save the remittance inflows.

Their findings suggest that both the level and predictability of remittance inflows should receive full attention in the design of policies for maximizing the benefits from remittance inflows into developing economies. Because policies may affect the magnitude, stability, and destination of remittance inflows and vice versa and because of the many potentially important impacts of remittances, analyses of their economic impact often seek to inform the design of policies to improve the impact on remittance inflows.

Developing countries that are recipients of remittance flows can select from a wide range of policies to facilitate those flows:. Relaxing exchange and capital controls, as well as the operation of domestic banks overseas, to facilitate international transactions by banks and financial institutions. Providing identification cards that allow migrants access to financial institutions. While most remittance flows continue to be sent through money transmission firms, such as Western Union or MoneyGram, facilitating access to banking services lets migrants take advantage of the more secure and less expensive transmission methods offered by banks while helping them build a relationship with the bank.

Developing that relationship is key in gaining financial literacy and access to credit for asset accumulation and investments. Creating matching fund programs and promoting hometown associations that invest remittance flows in their home communities. Establishing the necessary institutional arrangements to educate, inform, and orient potential migrants before they emigrate to improve their well-being in the host country and facilitate the flow of remittance funds back home. Host countries, too, can facilitate this alternative source of foreign exchange flows:.

Reducing remitting costs, so that more of the flows go to the intended recipients. This policy has already received considerable attention. Affecting migration and remittance flows through immigration policy. For example, immigration policies that facilitate the permanent settlement of migrants, such as the US Immigration Reform and Control Act, could strongly affect remittance flows, though the outcome may be ambiguous.

On the one hand, legalizing the status of migrants could facilitate their travel back and forth between the home and host country, allowing migrants to stay in touch with their family back home and facilitating the flow of remittances.

On the other hand, remittance flows could drop if migrants no longer envision their migration as temporary and settle permanently into their new life, gradually losing touch with their family back home [12]. Affecting migration and remittance flows through stronger enforcement of stringent immigration laws. Stronger enforcement, as has occurred in the US since September , can reduce the number of undocumented immigrants, restrict the cyclicality of migration flows, and limit employment opportunities for undocumented immigrants.

Recent studies show how increased enforcement reduces the share of migrants sending money home. However, legal immigrants tend to increase their money outflows enough to offset any reductions in remittances from undocumented immigrants. For example, the average dollar amount remitted per Mexican immigrant in the US has risen in the midst of increased uncertainty, thus protecting one of the least volatile sources of income in the developing world [13].

Overall, when considering the impact of remittance flows on receiving economies, it is important to keep in mind research limitations that undoubtedly shape study findings. Most studies focus on a specific country or region at a particular point in time. Because of cultural differences and country idiosyncrasies, some of the empirical evidence based on a specific country might not generalize to other economies. For instance, even if remittances cause Dutch disease in some Latin American and Caribbean economies, they might not do so in a large economy like Mexico.

Furthermore, remittance impacts might vary over time within a given country depending, among other things, on its policies and the characteristics of emigrants. Further, studies have applied many different methodologies as they try to get at the causal impacts of remittance flows. These differences undoubtedly contribute to the diversity of findings. Some studies implement randomized trials, some exploit natural experiments, some rely on instrumental variable methods, and others do none of these.

And getting at the causal impact of remittances remains a challenge given concerns about the endogeneity of remittances, the difficulty of separating the impacts of migration from those of remittances, and the selection of migrants into emigration and remitting, to mention a few. Because of the size and stability of these flows, remittances have the potential to help developing countries in a number of ways, from improving their economic stability and creditworthiness to attracting funds for asset accumulation and investments in human capital.

The main challenge remains the design of policies that can promote these flows and their productive use while taking into account the idiosyncrasies of each country at a particular point in time. In addition, while research has expanded the understanding of remittance flows and their impacts, there is more to learn about how the periodicity and predictability of the flows affect their impact. These aspects of remittance flows could prove crucial to the design of policies that can help developing economies attract the most remittance flows and use them most productively.

The bank does not estimate outflows. Estimates from the Banco de Mxico indicate that all gross inflows adjusted for inflation rose by an average of 11 percent per year during the past decade. The difference between BEA's and the Banco de Mxico's estimates could stem not only from differences in definitions but also from differences in methodology and source data.

Beginning in , all Mexican banks and money transfer companies were required to register with the Banco de Mxico and to report monthly remittances by state. Prior to that rule change, the Banco de Mxico inferred remittances from a census of different Mexican financial institutions.

In addition, around that time, the "matricula consular"—an identification card issued by the Mexican government to Mexican nationals living outside of the country—began to be accepted for opening bank accounts in the United States; that change may have helped facilitate money transfers to Mexico in a way that allowed the Banco de Mxico to better record them.

Finally, the Banco de Mxico also conducts a border survey that asks returning migrants about cash and goods that they are bringing to relatives in Mexico. With the apparent increased use of more formal channels to transfer money between the United States and Mexico and those border surveys, the official Mexican statistics are recording cash transfers not captured in the past.

About two-thirds of global inflows was sent as personal transfers, about 30 percent was recorded as compensation of employees, and about 5 percent stemmed from migrants' capital transfers. The discrepancy between total inflows and total outflows underscores the deficiencies of remittance data, which are collected or estimated in different ways in different countries.