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This paper was written when the author was at the Resident Representative office of the IMF in New Delhi, India. I would like to thank Ashoka Mody, Sudip Mohapatra, Helene Poirson, Catriona Purfield, and Jerry Schiff for their helpful comments.
Remittances (also known as current transfers) include worker’s remittances and other private transfers on current account.
Since some of the remittances are likely to filter out of the economy through higher imports, the net impact on current account balance is perhaps smaller than the total flow of remittances.
Though we are unaware of any study on India that looks at the end-use of remittances, evidence from other countries shows that remittances are mostly used for consumption and for investment in land and property.
We have used the data for gross transfers (i.e., we did not net out remittances paid) in the analysis, however, since the transfers paid are very small, the net and gross transfers do not differ much in India.
Researchers have used either the household level data (e.g., Lucas and Stark (1985) or the aggregated macro level data (e.g., Chami et al. (2003), Straubhaar (1986)) to analyze the possible determinants and effects of remittances.
Evidence on the contrary is found in Straubhaar (1986), who finds remittances to Turkey to be sensitive to temporary domestic political instability. He also finds that remittances do not respond strongly to the incentives offered to migrants to remit.
Jadhav (2003) analyzes the determinants of worker’s remittances to India. Using a log linear regression specification, he includes oil prices, US GDP, an interest rate variable (difference between NRI interest rate and LIBOR) and exchange rate depreciation as the explanatory variables. He finds remittances to be associated positively with the oil prices and an exchange rate depreciation. The analysis in this paper differs from Jadhav (2003) in many important aspects. First, we use either stationary variables or include lagged values of the I(1) variables in the regressions in order to eliminate the problem of spurious regressions. Second, we use a more complete specification by including a trend and/or the variables on the RHS which may explain the trend behavior in remittances. Finally, we include a somewhat more comprehensive set of explanatory variables.