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On Remittances and Velocity
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DOI：10.1007/s10614-025-11199-2.png)
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Abstract
En 中文
The response of the velocity of money to the remittances cycle is evaluated using a cash-in-advance (CIA) model driven by serially correlated remittance and monetary shocks. The model economy is solved using finite elements and a parameterized expectations algorithm to effectively allow for the CIA-constraint to occasionally bind, allowing for a rigorous analysis of changes to the velocity of money when affected by these exogenous shocks. The CIA-constraint in this model requires agents to hold real remittances or real money balances for consumption. Consistent with a precautionary savings motive, the CIA-constraint does not bind at low realizations of remittances shocks when these are highly persistent. The model predicts that the velocity of money is positively correlated with the ratio of remittances to GDP and with the growth rate of remittances, and that velocity is negatively correlated with the growth rate of monetary shocks. The model also predicts that the correlation of velocity with the growth rate of remittances is stronger in economies with a higher ratio of remittances to GDP; and it is weaker when the growth rate of remittances has been sufficiently low, and these growth rates are highly persistent. Lastly, the model predicts that velocity has no correlation with the growth rate of remittances when monetary policy has a high volatility. An empirical analysis of Latin-American countries provides supporting evidence to the model predictions.
Keywords:
Remittances
Cash-in-advance
Money velocity
Finite element method
Inequality constraints
Journal
C
IF:
2.2
Papers:
255
Citations:
2.3K
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