Keywords: remittances, migration, fixed effect, random effects, LLC, instrumental variables, currency appreciation, Latin America, foreign exchange, terms of trade, foreign aid
The role of remittances in currency appreciation in 25 Latin American countries
Remittances are a transfer from mostly developed countries to less developed countries by the workers that have migrated for work. For some countries the magnitude is huge. In the western hemisphere the remittances flow mostly from the USA to Latin countries. Theoretically, the flow of remittances causes a depreciation of foreign currency in the country of origin and an appreciation of currency in the recipient country. The empirical evidence is mixed and depends on the country. The present study provides a panel discussion of the impact of remittances on the currencies of 25 Latin American countries. The objective is to verify the claim that the currencies must appreciate because of the inflow of the remittances. Another objective is to determine the magnitude of the appreciation. Finally, the currencies of the sample countries are compared for signs of difference in magnitude of changes in their currency valuation as the result of remittances. The present paper provides analytical solutions to this complex problem. The size of government fails to be a factor on foreign exchange. The best model is the one that achieves stationarity through differencing using logarithmic data. Remittances, terms of trade, and the amount of foreign aid prove to affect the value of foreign exchange.