Macroeconomic Impacts of Remittances: A Two-Country, Two-Sector Model

Macroeconomic Impacts of Remittances: A Two-Country, Two-Sector Model

Macroeconomic Impacts of Remittances: A Two-Country, Two-Sector Model 1024 536 Cambodia Development Center

AUTHOR

*Sokchea Lim is an assistant professor and Mulwick scholar in the Department of Economics and Finance at John Carroll University, Ohio, U.S. He holds a PhD in Economics from Southern Illinois University Carbondale, U.S.

**Channary Khun is an independent researcher and currently works as a consultant at International Fund for Agricultural Development (IFAD). She holds a PhD in Economics from Southern Illinois University Carbondale, U.S.

ABOUT Working Paper

We examine the impacts of remittances on foreign direct investment and the development of emerging countries using a macro-dynamic model of two small open economies designated as advanced and developing country. Specifically, we incorporate a two-sector framework for the latter: traditional non-traded and foreign capital dependent traded sector while introducing collateral effects of remittances. The results from extensive calibration exercises show that remittances in the presence of labor migration hurts the traded sector of the developing economy, leading to a contraction in aggregate output in the long run. Albeit to a lesser extent, the contraction persists even with the expansionary impacts of remittances through a collateral effect, giving rise to a phenomenon known as a migration-remittance trap.

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