Exchange Rate Uncertainty and Workers’ Remittances: Empirical Bayesian Approach

Abstract

Exchange rate is one of the important determinates of worker’s remittances to a country. Level of exchange rate as well as any fluctuation in it influences the volume of workers’ remittances. The present study uses data of workers’ remittances from ten major countries to Pakistan for the period 1973 to 2012. Uncertainty of exchange rate is estimated through GARCH model. We use Empirical Bayesian approach to compute posterior information (estimates, for which, the GMM estimates are used as prior in order to avoid biasness and inconsistency due to the presence of endogeniety in our model. The Empirical Bayesian estimates are found to be more efficient in terms of significance and correct signs of modeled variables. The findings suggest a significant role of home and host country characteristics in most of the cases. The findings also reveal a negative impact of exchange rate uncertainty on the inflow of remittances. The political instability reveals an insignificant impact on remittances. The study recommends different policy options for different host countries. Apart from the Middle East, the policy for other regions (like USA, Canada, and Germany etc.) must be considered separately to encourage inflow of remittances. Appropriate stabilization measures have to be taken on priority basis to curtail volatility of exchange rates and to ascertain regular inflow of remittances.