Remittances and Macroeconomic Volatility in African Countries

This paper investigates the channels through which remittances affect macroeconomic volatility in African countries using a dynamic stochastic general equilibrium (DGSE) model augmented with financial frictions. It assesses the empirical correlation between remittances and business cycle volatility and the extent of risk sharing through remittances. The paper finds that remittances, as a share of GDP, have a significantly smoothing impact on output volatility but their impact on consumption volatility is somewhat small. It states that remittances are found to absorb a substantial amount of GDP shocks in these African countries. The paper covers the following sections in detail:

• Review of relevant literature;
• Empirical evidence with a focus on the relationship between remittances and macroeconomic volatility and remittances and risk sharing;
• Discussion on a hypothetical model of a small open economy with remittances;
• International financial markets and the role of remittances;
• Quantitative analysis with a focus on the role of wealth effect on labor supply and remittances and financial frictions;
• Sensitivity analysis with a focus on elasticity of labor supply, discounting dimension, intertemporal substitution, and capital adjustment costs;
• Concluding remarks and identification of areas for further research.