Impact of Remittances on International Risk Sharing
Comments on
What Types of Capital Flows Improve
International Risk Sharing?
Remittances!
By Ergys Islamaj and M. Ayhan Kose
Menzie D. Chinn
University of Wisconsin, Madison & NBER
Conference on
Financial Globalization and De-Globalization:
Perspectives and Prospects
City Univ. of HK, USC, Osnabruck University
May 3-4, 2021
Big Flows
Main Findings
•
For a sample encompassing 79 Emerging
Market/Developing Economies (EMDE’s), 1990-
2018
•
Higher remittances are associated with better risk
sharing (as measured by β between consumption
and income growth)
•
No such comparable finding is found for other
types of capital flows
Approach
•
Regress idiosyncratic consumption growth on
idiosyncratic global growth
•
Under maintained hypothesis of perfect risk
sharing,
β
=0
Approach
•
Regress idiosyncratic consumption growth on
idiosyncratic global growth
•
Under maintained hypothesis of perfect risk
sharing,
β
=0
•
Enhanced risk sharing effect if interactive term is
negative
Diagnostics?
Remittances and Risk Sharing
Using the risk sharing estimate:
Implies:
“…about 15 percent of the achieved risk
sharing in EMDEs can be attributed to
remittances.”
A Joint Hypothesis
•
Perfect capital mobility across countries and
zero transaction costs
•
Second, asset markets must be complete, so
that all idiosyncratic consumption risks are
insurable.
•
Third, in order for international trade in assets
that bear claims on a country's domestic output
to be feasible, output must be tradable.
•
So once one rejects composite null, point
estimate is not necessarily reflective of degree
of risk sharing
Maybe Not Such a Puzzle (with
Hindsight)
•
Private financial capital flows uphill, due to…
•
Institutional underdevelopment and possible
expropriation
•
Private flows procyclical due to asymmetric
information causing herding, runs
•
Remittances are not
as
susceptible to these
distortions (next slide)
- intra-household?
- harder to expropriate selectively?
Cyclicality
Conclusion
•
Clearly motivated, clearly organized
•
One of the few papers addressing remittances and
risk sharing at the cross-country
macro
level
•
Robust findings on remittances contrast nicely with
the near zero impact of capital flows
•
Establishes a new stylized fact
•
Looking forward - A panel analysis looking at how
remittances comove (or don’t) with financial capital
flows might be illuminating
Higher remittances in Emerging Market/Developing Economies (EMDEs) between 1990-2018 positively impact risk sharing between consumption and income growth, unlike other types of capital flows. Remittances contribute significantly to enhancing risk-sharing effects, offering about 15% of risk sharing in EMDEs. Factors affecting risk-sharing include perfect capital mobility, asset market completeness, and tradable output. Remittances are less susceptible to financial distortions compared to private capital flows.
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Presentation Transcript
Comments on What Types of Capital Flows Improve International Risk Sharing? Remittances! By Ergys Islamaj and M. Ayhan Kose Menzie D. Chinn University of Wisconsin, Madison & NBER Conference on Financial Globalization and De-Globalization: Perspectives and Prospects City Univ. of HK, USC, Osnabruck University May 3-4, 2021
Main Findings For a sample encompassing 79 Emerging Market/Developing Economies (EMDE s), 1990- 2018 Higher remittances are associated with better risk sharing (as measured by between consumption and income growth) No such comparable finding is found for other types of capital flows
Approach Regress idiosyncratic consumption growth on idiosyncratic global growth Under maintained hypothesis of perfect risk sharing, =0
Approach Regress idiosyncratic consumption growth on idiosyncratic global growth Under maintained hypothesis of perfect risk sharing, =0 Enhanced risk sharing effect if interactive term is negative
Remittances and Risk Sharing Using the risk sharing estimate: Implies: about 15 percent of the achieved risk sharing in EMDEs can be attributed to remittances.
A Joint Hypothesis Perfect capital mobility across countries and zero transaction costs Second, asset markets must be complete, so that all idiosyncratic consumption risks are insurable. Third, in order for international trade in assets that bear claims on a country's domestic output to be feasible, output must be tradable. So once one rejects composite null, point estimate is not necessarily reflective of degree of risk sharing
Maybe Not Such a Puzzle (with Hindsight) Private financial capital flows uphill, due to Institutional underdevelopment and possible expropriation Private flows procyclical due to asymmetric information causing herding, runs Remittances are not as susceptible to these distortions (next slide) - intra-household? - harder to expropriate selectively?
Conclusion Clearly motivated, clearly organized One of the few papers addressing remittances and risk sharing at the cross-country macro level Robust findings on remittances contrast nicely with the near zero impact of capital flows Establishes a new stylized fact Looking forward - A panel analysis looking at how remittances comove (or don t) with financial capital flows might be illuminating
