Macroeconomics

Collateral

Remittance

Yield (engineering)

Developing country

Metallurgy

Materials science

Chromatography

Economics

Market economy

Informal sector

Dutch disease

Stylized fact

Exchange rate

Small open economy

Monetary economics

Economy

Chemistry

Sample (material)

Economic growth

Finance

General equilibrium theory

Journal of Development Economics

Many developing countries are characterized by a large informal sector, and are also often heavily dependent on remittance inflows from abroad. We develop a general equilibrium framework to understand better the dynamic absorption of remittances in a two-sector small open economy, by incorporating many of the stylized features of the informal sector. Calibrating the model to yield a long-run equilibrium consistent with sample averages for 56 developing countries for the period 1990–2014, we show that the effect of remittances depends critically on how they impinge on the recipient economy, i.e., whether these inflows are (i) permanent or temporary, (ii) associated with a collateral effect to securitize borrowing, and (iii) exogenous or countercyclical. We also identify the conditions under which remittances are associated with an expansion of the informal sector, as well as the Dutch Disease effect.

Remittances and the informal economy