Working Paper Series: Special Edition of 2016 to 2018 Interns

1 Introduction Historically, remittances were an important part of European development, especially in the eastern European states. England, France, Spain and Portugal colonized the lands in the region and extracted essential resources that were remitted back to the respective motherland to augment their treasury, boost their economy and eulogize their power in Europe. This meant that ‘remittances’ and resources were flowing from the region to other economies. In recent times, the directional flow of remittances’ have turned significantly with developing countries being the main recipient. Remittances in the form of foreign monetary transfers to developing countries, especially countries in Latin America and the Caribbean, have contributed to fostering economic growth, alleviating poverty, and enhancing consumption and investment. Remittances are private monetary transfers across borders that often involve transactions between different currencies, and have become a global phenomenon. The past few decades have experienced an upsurge in the value of remittances transfers globally. For many developing nations, remittances represent a significant part of international capital inflows rivalling export revenues, foreign direct investments (FDI) and international aid 28 . Cumulatively remittances are currently the second largest source of foreign exchange earner, both in absolute terms and as a percentage of GDP. For some countries, remittances represent more than 10 percent of GDP. This is the case for small Caribbean and Pacific Islands, some Latin American countries and for some labour-exporting countries, such as Albania, Tonga, Moldova, and the Philippines 29 . With this upward monotonic concavity in remittances movement, GDP growth does not seem to mirror remittances movement in some economies whilst in others, the growth increases simultaneously. This sparked interest among academics and policy makers alike, especially as it relates to the type of exchange rate regime and its role in determining how remittance flow influences growth. This paper will investigate the importance of remittances to developing economies and how they influence growth, given the exchange rate regime. It is argued that there is a greater uncertainty effect that recipients of remittances may encounter in economies with floating exchange rate

28 Giuliano P., and Ruiz-Arranz M (2005), “Remittances, Financial Development, and Growth”, IMF Working Paper 29 IMF Data Bank

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