The Macroeconomics of Remittances In the Philippines

The literature on remittances has in the past concentrated on the
microeconomic aspects of the remittance process: the determinants of
remittances, impact of remittances on household allocation decisions, and their
impact on poverty. Only recently has there been more attention on the
macroeconomic impact of remittances. It is to be expected that, when
remittance inflows are as large as they are in the Philippines, they are likely to
have significant macroeconomic effects.

Our paper first explores the cyclical dynamics of remittances to the
Philippines and secondly, analyses the macroeconomic impact of remittances
and the monetary policy implications. In this second endeavour, our paper uses
a dynamic structural quarterly macroeconometric model of the Philippines to
trace the various channels along which remittances affect the main
macroeconomic variables.

In the assessment of the impact of the recent global recession we should
also consider the remittances as a transmission channel. We have established
that remittances are driven by the economic cycle of the main host countries
and that the ongoing recession will thus lead to a decline in transfers. Through
our model we have been able to trace the impact of changes in remittances on
important economic variables, like aggregate demand, money supply and
interest rates, exchange rate and labour supply and wages. We have also
established that the fluctuations in remittances flows over the years are of a
magnitude that is significant enough for policy makers to take notice. The
model simulations have shown that the impact of the US recession on the
Philippine economy is more severe once we take account of the endogeneity
and pro-cyclicality of remittances.