Monetary and Exchange Rate Policy under Remittance Fluctuations
Federico S. Mandelman
Working Paper 2011-7
Using data for the Philippines, I develop and estimate a heterogeneous agent model to analyze the role of monetary policy in a small open economy subject to sizable remittance fluctuations. I include rule-of-thumb households with no access to financial markets and test whether remittances are countercyclical and serve as an insurance mechanism against macroeconomic shocks. When evaluating the welfare implications of alternative monetary rules, I consider both an anticipated large secular increase in the trend growth of remittances and random cyclical fluctuations around this trend. In a purely deterministic framework, a nominal fixed exchange rate regime avoids a rapid real appreciation and performs better for recipient households facing an increasing trend for remittances. A flexible floating regime is preferred when unanticipated shocks driving the business cycle are also part of the picture.
JEL classification: F40, F41, O10
Key words: remittances, small open economy, exchange rate regimes
The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Federico Mandelman, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8785, firstname.lastname@example.org.
Use the WebScriber Service to receive e-mail notifications about new papers.