What's different about monetary policy transmission in remittance-dependent countries?

Where do Remittances Go in Household Consumption? Empirical Evidence from Sri Lanka‐Wide Micro‐data

“…Remittances, cash or goods received by household members from absent members of the household, are the most common, stable, non‐market personal transfers based on familial relationships across countries (Barajas et al, ) due to large‐scale global labour mobility. There are two types of remittances: internal and international.…”

“…urban to rural) are internal remittances while remittances received from overseas are international remittances. International remittances have become the largest form of foreign exchange earnings for developing countries at US$596 billion in 2017 (World Bank, ) and “the average worker's remittances‐GDP ratio for all developing countries over the period 1980–2012 is 1.29%, compared to 1.95% for foreign direct investment, 1.68% for other private capital flows, and 0.80% for official transfers” (Barajas et al, : 272). Remittances cross regions but the South Asian region claims nearly 25% of total remittances globally (World Bank, ).…”

“…By considering at the individual household level, Valatheeswaran and Khan () and Petreski et al () argue that remittance‐led investments in human capital (commonly in children's education and health) create a positive impact on economic growth in recipient countries, while spending on basic consumption generates better living standards of low‐income households in the long run. Some (Barajas et al, ; Sobiech, ), however, focusing on its macroeconomic effectiveness, conclude that remittances are “potential contributor to the ineffectiveness of monetary transmission” (Barajas et al, : 285). A recent study on Bangladesh highlights that remittances create a U‐shaped pattern economic growth, which is “negative initially but later becomes positive” (Hassan et al, : 105).…”

Do Remittances Enhance Financial Inclusion in LMICs and in Fragile States?

“…Another strand of the literature highlighted the effect of remittances on financial sector development (Martínez Pería, Mascaró, and Moizeszowicz, 2008;Gupta, Pattillo, and Wagh, 2009;Aggarwal, Demirgüç-Kunt, and Martínez Pería, 2011;Chowdhury, 2011;Cooray, 2012, Barajas et al, 2018. This literature suggests that remittances are likely to promote financial development if these flows are transformed into available loanable funds for the private sector through financial intermediaries.…”

“…The intuition for this non-monotonic and "U" shaped relationship is that at low levels of remittance-to-GDP, these flows are mainly used for consumption purposes by the liquidity-constrained households operating in countries characterized by credit market imperfections, and this also leads to a process of disintermediation. Mishra et al (2012) and Barajas et al (2018) point out that in many LMICs, financial markets are characterized by severe asymmetric information problems, borrower opaqueness, weak legal and institutional frameworks, and oligopolistic banking behavior-all leading to high cost of borrowing and credit rationing. Thus, remittances in this case, by alleviating credit-constraints for the household, are likely to be used by the latter to avoid using the formal financial systemleading to a process of disintermediation.…”