By Ahmat Jidoud
This paper investigates the channels through which remittances affect macroeconomic volatility in African countries using a dynamic stochastic general equilibrium (DSGE) model augmented with financial frictions. Empirical results indicate that remittances–as a share of GDP–have a significant smoothing impact on output volatility but their impact on consumption volatility is somewhat small. Furthermore, remittances are found to absorb a substantial amount of GDP shocks in these countries. An investigation of the theoretical channels shows that the stabilization impact of remittances essentially hinges on two channels: (i) the size of the negative wealth effect on labor supply induced by remittances and, (ii) the strength of financial frictions and the ability of remittances to alleviate these frictions.
This is a rare paper that applies DSGE methods to Africa. It also addresses an important question, as African economies are extremely volatile and suffer from large frictions, to the point that the volatility of consumption is higher than that of output. Finally, remittances have become more much larger over the years as a share of GDP, and thus offer potentially interesting ways to insure against domestic fluctuations.