Evidence on the Linkages between Remittances and the Macroeconomy

Abstract

This paper analyzes the linkages between remittances, consumption, investment, and GDP for the small open economy of the Philippines. Taking advantage of the superior remittance reporting of this archipelago nation, we document that remittances share a long-run relationship with consumption, investment, and GDP. Our results show that remittances are useful for forecasting investment, consumption, and GDP. While an innovation to remittances do not contribute to the variance of aggregate investment, over 13% of the variance of consumption is explained by an innovation to remittances. Furthermore, an innovation to remittances impacts consumption and GDP positively. Overall our findings suggest that remittances impact the variability of GDP via the consumption channel. (E20, F24)