Macroeconomic effects of foreign aid and remittances: Implications for aid effectiveness studies

International worker remittances and economic growth in a Real Business Cycle framework

“…The current study is closely related to two papers: Annen and Kosempel (2012) and Annen et al (2016). In Annen and Kosempel (2012) they used a closed economy RBC model to evaluate the effectiveness of foreign aid.…”

“…Also, they empirically test the effectiveness of aid to economic growth. In Annen et al (2016) they evaluated the effectiveness of wealth transfers through a closed economy RBC model. They define wealth transfers to include remittances and foreign aid.…”

“…In the current study I instead use the HP filter to decompose remittance. And finally, Annen et al (2016) provided a policy discussion on the role of wealth transfers to economic growth. In contrast, the current study makes use of a positive (as opposed to normative) approach as it is solely focuses on explaining the general equilibrium effects of remittances.…”

“…There is not much difference between GDP and GNP in terms of volatility. Consumption is more volatile than output which suggest difficulty in consumption smoothing, a stylized business cycle fact among developing countries (Rand and Tarp, 2002;Annen et al, 2016). Remittance is ayclical for 35 countries (or 71%) in the sample.…”

“…where ψ > 0 andb are parameters. The model will be simulated numerically following the method described in King et al (1988) and Annen et al (2016). As shown in table 2, parameter values are set so that the model's properties match averages from data for remittance recipients.…”