The Impact of Remittances on Exchange Rate and Money Supply: Does "Openness" Matter in Developing Countries?

Using a perfect-foresight general equilibrium monetary model, this article explores the impact of migrants' remittances on exchange rate and money supply in developing countries and the effect of their "openness" on the impact. The findings indicate that the inflow of remittances leads to appreciation of the nominal exchange rate and increase of money supply under the fixed exchange rate regime. Moreover, a greater degree of openness helps mitigate the appreciation. These findings suggest that remittances and the degree of openness play a significant role in complementing monetary and exchange rate policy, helping to boost economic development. Using a sample of 114 developing countries from 1970 to 2013, empirical tests with both Anderson-Hsiao with instrumental variables and system generalized method of moments' estimations confirm the theoretical findings.