Financial Update (First Quarter 2008)

Conference Explores Remittances' Economic Effects

global map graphic Remittances sent from immigrants in the United States to their native countries are a recent economic phenomenon. As a result, little study of their macroeconomic effects has been undertaken.

The Atlanta Fed's Americas Center held a conference, "Remittances and the Macroeconomy," in Atlanta in February that convened researchers interested in those effects and in expanding this area of research.

Remittances' wider economic effects bear scrutiny
While extensive research exists on the microeconomic impact of remittances on areas such as income distribution and poverty, the literature was almost nonexistent on the effects on entire economies, said Federico Mandelman, research economist and assistant policy adviser at the Atlanta Fed. Macroeconomic effects include inflation and over appreciation of the domestic currency in some countries where remittances account for a large part of economic activity, Mandelman said.

Remittances reduce poverty
Developing countries received an estimated at $240 billion in remittances in 2007, according to the World Bank—an increase of more than 130 percent since 2001. In developing countries, remittances make up about 2 percent of total income and have become increasingly important as a source of foreign income in terms of both magnitude and growth.

Remittances make up a large portion of the economy of El Salvador, for example, and that nation has experienced high inflation, Mandelman pointed out. Inflation and overappreciation of the currency create problems for manufacturers and farmers because their prices are higher, he explained.

Americas Center
Conference agenda and selected papers

On the other hand, studies show that remittances help nations in many ways, including helping to reduce poverty, improving income distribution, providing financing for microentrepreneurs, and enhancing human capital by, for example, letting children spend more time in school instead of working.

Collaborative research a benefit of conference
Conference attendees were able to examine each other's work, said Stephen Kay, coordinator of the Atlanta Fed’s Americas Center. "We want to continue to foster this kind of research and collaboration," he said.

The conference featured papers and remarks by economists from numerous universities and institutions, including the International Monetary Fund, the Bank of Spain, the World Bank, the Federal Reserve Banks of Atlanta and Chicago, the Federal Reserve Board of Governors, the Massachusetts Institute of Technology, the University of Michigan, the University of Notre Dame, and Georgia Tech.

Federal Reserve adds convenience to remittances
To foster remittances, the Atlanta Fed's Retail Payments Office offers Directo a México, a service for customers of U.S. financial institutions to send personal and business payments to Mexico. These projects include funds sent from the Social Security Administration to recipients in Mexico.

The service is part of the suite of FedACH International Services, which helps U.S. banks offer a secure and less expensive means of transferring money to their customers. That effort began as part of a 2001 agreement—the Partnership for Prosperity—signed by President Bush and then Mexican President Vicente Fox.

Fox's successor, Felipe Calderón Hinojosa, officially endorsed Directo a México in 2007 as the best tool to reduce the cost of money transfers to Mexico.

March 24, 2008