Aid has been for decades an important source of financing for developing countries, but more recently remittance flows have increased rapidly and are beginning to dwarf aid flows. This paper investigates how remittances affect aid flows, and how this relationship varies depending on the channel of transmission from remittances to aid. Buoyant remittances could reduce aid needs when human capital improves and private investment takes off. Absent these, aid flows could still drop as remittances may dampen donors' incentive to scale up aid. Concurrently, remittances could be positively associated with aid if migrants can influence aid policy in donor countries. Using an instrumental variable approach with panel data for a sample of developing countries from 1975-2005, the baseline results show that remittances actually increase aid dependency. However, a refined model controlling for the channels of transmission from remittances to aid reveals that remittances lead to lower aid dependency when they are invested in human and physical capital rather than consumed.
The Research Summaries in the March 2013 Research Bulletin discuss "Trade Finance and Its Role in the Great Trade Collapse" (JaeBin Ahn) and "Sovereign Debt: How to Track Who Is Buying and Selling It" (Serkan Arslanalp and Takahiro Tsuda). The Q&A looks at "Seven Questions on the Implications of Global Supply Chains for Real Effective Exchange Rates" (Rudolfs Bems). Readers can also find in this issue a listing of recent IMF Working Papers, Staff Discussion Notes, and Recommended Readings from IMF Publications. The Bulletin also includes a call for papers for a research conference and information on free access to the IMF Economic Review in April.