Workers' Remittances and the Dutch Disease: Evidence From South Asian Countries

Large inflows of foreign money into a country can appreciate its domestic currency, which can adversely affect its current account balance. South Asian countries receive a significant amount of foreign currency as remittances. In this paper, we examine the Dutch disease effect of remittances in five South Asian countries, namely Bangladesh, India, Nepal, Pakistan and Sri Lanka using panel data from 1975 to 2014. Panel cointegration test provides evidence of the long-run relationship between remittances and the real exchange rate. The Fully Modified Ordinary Least Squares Method (FMOLS) is used to estimate the impact of remittances on real exchange rates. The findings suggest that remittances do appreciate the real exchange rate in South Asia. Pesaran, Shin, and Smith ([1999]. Pooled Mean Group Estimation of Dynamic Heterogeneous Panels. Journal of the American Statistical Association, 94, 621-634) Pool Mean Group (PMG) estimation technique is used to check the robustness of the findings. The PMG test results confirm the findings from the FMOLS.