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Three Essays on Remittance Effectiveness

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Title: Three Essays on Remittance Effectiveness
Author: Batu, Michael
Department: Department of Economics
Program: Economics
Advisor: Cellarier, LaurentKosempel, Stephen
Abstract: Latest estimates from the World Bank has pegged remittance flows around $404 billion in 2013 and is expected to reach $516 billion by 2016. Remittance has surpassed foreign direct investment, portfolio flows from financial markets, and official development assistance in many developing countries. The common wisdom is that if remittances are invested, they should contribute to output growth. Surprisingly, most scholars find the absence of any robust positive relationship between economic growth and remittances. In this dissertation I propose three reasons as to why it is difficult to find this relationship. In the first essay, I highlight the role of migration as an important channel through which remittances can influence economic growth. The effect remittance have on migration decision is ambiguous and it depends on two competing forces: the benefit of giving and the benefit of receiving remittances. The basic idea is that increased remittances affects the composition of the labor force of the recipient country and over time it will lead to an increase in savings, capital, and consequently, output. In the second essay, a model of an artificial economy which has the structure of the canonical small open economy real business cycle model augmented with stochastic remittance shocks was developed. The model was calibrated using data for remittance recipient countries and the calibration exercise reveals that the response of output to remittance shocks is small in comparison to other shocks. The model predicts that temporary inflows of worker remittances positively affect GDP per capita while a permanent increase of remittances does not. In the third essay I built and calibrated a two-sector real business cycle model to analyze the effects of remittances on human capital accumulation in developing countries. The model has two key results: First, I find that an unanticipated temporary increase in remittances leads to an initial decline in labor supply and an increase in consumption demand. Second, the increase in remittances leads to an increase in education spending which raises human capital and output in the short run. Increasing disposable income through remittances may increase investment in schooling and relaxes the budget constraint.
URI: http://hdl.handle.net/10214/8975
Date: 2015-07
Rights: Attribution-NonCommercial-NoDerivs 2.5 Canada


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