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© 2022 International Monetary Fund
WP/22/218
IMF Working Paper
Strategy, Policy and Review Department and Institute for Capacity Development
How Do Transaction Costs Influence Remittances?
Prepared by Kangni Kpodar and Patrick Amir Imam*
Authorized for distribution by Johannes Wiegand
November 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: Using a new quarterly panel database on remittances (71 countries over the period 2011Q1-2020Q4), this paper investigates the elasticity of remittances to transaction costs in a high frequency and dynamic setting. It adds to the literature by systematically exploring the heterogeneity in the cost-elasticity of remittances along several country characteristics. The findings suggest that cost reductions have a short-term positive impact on remittances, that dissipates beyond one quarter. According to our estimates, reducing transaction costs to the Sustainable Development Goal target of 3 percent could generate an additional US$32bn in remittances, higher that the direct cost savings from lower transaction costs, thus suggesting an absolute elasticity greater than one. Among remittance cost-mitigation factors, higher competition in the remittance market, a deeper financial sector, and adequate correspondent banking relationships are associated with a lower elasticity of remittance to transaction costs. Similarly, remittance cost-adaptation factors such as enhanced transparency in remittance costs, improved financial literary and higher ICT development coincide with remittances being less sensitive to transaction costs. Supplementing the panel analysis, the use of micro data from the USA-Mexico corridor confirm that migrants facing higher transaction costs tend to remit less, and that this effect is less pronounced for skilled migrants and those that have access to a bank account.
| JEL Classification Numbers: | D23, F24, F32 |
| Keywords: | Remittances; Transaction Costs; Elasticity; Migration |
| Author’s E-Mail Address: | pimam@imf.org; kkpodar@imf.org |
| JEL Classification Numbers: | D23, F24, F32 |
| Keywords: | Remittances; Transaction Costs; Elasticity; Migration |
| Author’s E-Mail Address: | pimam@imf.org; kkpodar@imf.org |
Title Page
WORKING PAPERS
How Do Transaction Costs Influence Remittances?
Prepared by Kangni Kpodar and Patrick Amir Imam
Contents
I. INTRODUCTION
II. DATA AND EMPIRICAL STRATEGY
A. Cost of Remittances and Remittance Flow Data
B. Stylized Facts on Remittance Costs
C. The Model and Econometric Approach
III. THE RESULTS
A. How Elastic Are Remittances to Transaction Costs?
B. Explaining Heterogeneities in the Cost Elasticity of Remittances
C. Examining the Response of Remittances to Transaction Cost: Evidence from Micro Data from the US-Mexico Corridor
IV. Conclusion
References
FIGURES
1. Average fee as a share of a $200 USD remittance (2011Q1-2020Q4) (percent)
2. Change in Average fee for a $200 USD remittance (2016Q1-2020Q1) (percent)
3. Trends in Average fee for a $200 USD remittance and Interest Rate Spread (2011-20) (percent)
4. Average fee for a $200 USD remittance by Type of Provider (2011Q1-2020Q4) (percent)
5. Remittances Flows and Average fee for a $200 USD remittance (2011Q1-2020Q4)
6. Cost-Elasticity of Remittances: Local Projections
7. Cost-Elasticity of Remittances with Respect to Competition in the Remittance Market
8. Cost-Elasticity of Remittances in Countries with Low and High Financial Development
9. Cost-Elasticity of Remittances and Correspondent banking relationships
10. Cost-Elasticity of Remittances and Price Transparency
11. Cost-Elasticity of Remittances and Education level
12. Cost-Elasticity of Remittances and ICT Development
13. Cost-Elasticity of Remittances and ICT Affordability
TABLES
1. Transaction Costs and Remittances: Fixed-Effect Estimates
2. Transaction Costs and Remittances in the US-Mexico Corridor
3. Transaction Costs and Remittances in the US-Mexico Corridor: The Role of Financial Literacy
4. Transaction Costs and Remittances in the US-Mexico Corridor: Instrumental Variable Approach
ANNEXES
1. Sample Composition
2. Summary Statistics and Correlation Matrix
ANNEX TABLES
1. Cost-Elasticity of Remittances: Local Projections
2. First-Stage Regression
ANNEX FIGURES
1. Change Cost-Elasticity of Remittances: Instrumental Variable Local Projections
2. Cost-Elasticity of Remittances: Low vs High Transaction Cost
3. Cost-Elasticity of Remittances with respect to the Geographical Coverage of Financial Institution
4. Cost-Elasticity of Remittances with respect to Access to Deposit Accounts
5. Cost-Elasticity of Remittances and ICT Access
6. Cost-Elasticity of Remittances and ICT Use
7. Cost-Elasticity of Remittances and ICT Capability
Kpodar: International Monetary Fund and FERDI; Imam: International Monetary Fund. This paper benefited from insightful comments and suggestions from Carine Meyimdjui, Cedric Okou, Baoping Shang and Azar Sultanov. This research is part of the Macroeconomic Research in Low-Income Countries project (Project ID: 60925) supported by the UK’s Foreign, Commonwealth and Development Office (FCDO). The views expressed in this paper are those of the authors and do not necessarily represent the views of the International Monetary Fund (IMF), or FCDO