Beware of Emigrants Bearing Gifts: Optimal Fiscal and Monetary Policy in the Presence of Remittances

By Michael T. Gapen, Thomas F. Cosimano, Ralph Chami

March 1, 2006

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Michael T. Gapen, Thomas F. Cosimano, and Ralph Chami. Beware of Emigrants Bearing Gifts: Optimal Fiscal and Monetary Policy in the Presence of Remittances, (USA: International Monetary Fund, 2006) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper uses a stochastic dynamic general equilibrium model to investigate the influence of countercyclical remittances on the conduct of fiscal and monetary policy and trace their effects on real and nominal variables in a business cycle setting. We show that remittances raise disposable income and consumption, and insure against income shocks, thereby raising household welfare. However, remittances increase the correlation between labor and output, thereby producing a more volatile business cycle and increasing output and labor market risk. Optimal monetary policy in the presence of remittances deviates from the Friedman rule, highlighting the need for independent government policy instruments.

Subject: Balance of payments, Consumption, Income, Labor, Labor supply, Labor taxes, National accounts, Remittances, Taxes

Keywords: Baseline economy, Business cycle, Caribbean, Consumption, Countercyclical remittance, Equilibrium price, Equilibrium remittance, Government spending, Income, Labor supply, Labor taxes, Marginal product of labor, Money supply, Optimal monetary policy, Optimal taxation, Presence of remittance, Price level, Private income, Ramsey policies, Rate of inflation, Remittance behavior, Remittance flow, Remittances, Utility function, WP

Publication Details

Pages:

51
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2006/061
Stock No:

WPIEA2006061
ISBN:

9781451863215
ISSN:

1018-5941

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