Unraveling Dutch disease: remittances and exchange rate dynamics pre and post-GFC trends in 199 countries

What is it about?

Previous research on whether remittances can cause the Dutch disease is inconclusive. However, remittances can lead to sectoral imbalances, adversely affecting the economy. This study aims to assess the impact of remittances on real exchange rate movements in 199 countries and territories from 1999 to 2019, dividing the period into pre-GFC (1999-2009) and post-GFC (2010-2019). Using a one-step GMM estimator on linear dynamic panel data, our significant findings reveal that remittances generally depreciate exchange rates, especially in low-middle-income countries. Conversely, in high-income countries, the first lag of remittances has a significantly negative impact, while lower-middle-income countries experience a significantly positive impact. Low- or lower-middle-income economies should adopt appropriate macroeconomic policies to counter the Dutch disease. Policies such as variable export taxes and exchange rate depreciation can encourage recovery and promote commodity trade, fostering long-term economic benefits. Additionally, this self-balancing mechanism protects the economy from long-term currency value depreciation.

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