Remittances and Macroeconomic Volatility in African Countries

This paper investigates the channels through which remittances affect macroeconomicvolatility in African countries using a dynamic stochastic general equilibrium (DSGE) modelaugmented with financial frictions. Empirical results indicate that remittances—as a share ofGDP—have a significant smoothing impact on output volatility but their impact onconsumption volatility is somewhat small. Furthermore, remittances are found to absorb asubstantial amount of GDP shocks in these countries. An investigation of the theoreticalchannels shows that the stabilization impact of remittances essentially hinges on twochannels: (i) the size of the negative wealth effect on labor supply induced by remittancesand, (ii) the strength of financial frictions and the ability of remittances to alleviate thesefrictions.