Beruflich Dokumente
Kultur Dokumente
o
3
E
it
o
4
r
2
it
o
5
Pol
it
c
it
6
where the new error c
it
j
it
o
4
o
2
it
r
2
it
now includes an
additional term attributable to r
2
it
s error in proxying o
2
it
.
Note that Equation 6 cannot be consistently estimated
by least squares because the proxy r
2
it
is correlated
with the error c
it
. Assuming Er
2
it
j
it
0, Pagan and
Ullah (1988) demonstrate that in general
Er
2
it
c
it
Eo
2
it
Er
4
it
6 0
The regression Equation 6 suers from the classical
errors in variables problem. Pagan and Ullah suggest
that the problem can be solved using an IV procedure.
They show that a valid instrument for r
2
it
is any variable
constructed from the information set which correlates with
the true o
2
it
. Their procedure is used here with the estimator
^ oo
2
it
in Equation 5 taken as the instrument for r
2
it
. Since
^ oo
2
it
is consistent for o
2
it
, it should be strongly correlated
with o
2
it
even though it is only based on monthly subinter-
vals. The advantage of the Pagan and Ullah procedure is
that the IV estimator of Equation 6 will be consistent as N
and T go to innity. It does not require that the number
of subintervals at which the exchange-rate return is
observed goes to innity.
V. ESTIMATION RESULTS FOR THE
REMITTANCE EQUATION
Table 3 presents the estimates of the determinants of real
remittances per immigrant. The rst column corresponds
to the xed eects estimates of Equation 2 while the
second column employs the Pagan and Ullah IV procedure
described earlier. In both cases the heteroscedasticity/
serial correlation consistent variancecovariance matrix
estimator suggested by Newey and West is employed.
An additional potential problem exists with estimation
of the remittance equation, as it is possible that the level of
the real exchange rate varies with the magnitude of remit-
tances with large inows causing real appreciation to take
place. To account and correct for the endogenous regres-
sor problem the real exchange rate is instrumented with
the terms of trade, a variable thought to be exogenous,
yet correlated with the real exchange rate.
Interpretation of the coecients derived from the esti-
mation of Equation 2 results in a rather consistent story.
A 1% rise in the US unemployment rate reduces remit-
tances by 8%. Remittances respond directly to the ability
of the remitter to send earnings home, as would be
expected. Turning next to home country income, improved
economic conditions at home very decidedly prompt work-
ers to send remittances. The estimate suggests that a 10%
increase in per capita incomes in the home country raises
remittances by 21% in the rst model. This result supports
the self-interest and investment hypotheses discussed
earlier. It is consistent with Lucas and Starks ndings
for Botswana where higher levels of the migrant familys
incomes is followed by higher ows of remittances.
Turning next to the return and risk variables, it is seen
that while the coecient on the level of the real exchange
rate is not statistically dierent from zero, the impact of
exchange-rate risk on workers remittances is statistically
nonzero. The coecient indicates that as volatility
increases, the level of real remittances per immigrant
decreases. These results support the hypothesis that more
uncertainty in exchange-rate returns lowers the level of
remittances owing to Latin American countries for invest-
ment purposes. The coecient on this variable (1.885)
suggests that a one standard deviation increase in uncer-
tainty in the real exchange rate reduces remittances
ows by 8%.
6
In contrast, to the economic risk variable,
the coecient of the qualitative (0,1) political risk dummy
variable, is not signicantly dierent from zero.
Since it is based on only monthly observations, it is pos-
sible that the nonparametric estimator of exchange-rate
risk still produces large measurement error. In the presence
of such measurement error, the estimator of the coecient
on the uncertainty variable is biased. Such a bias would
reduce the measured impact of exchange-rate uncertainty
on per immigrant remittances. To account for this
Equation 2 has been re-estimated using the IV technique
suggested by Pagan and Ullah. The regressors are the
same as in the previous model with the exception of
the exchange-rate uncertainty variable which is now
represented by the squared return r
2
it
. This variable is
6
%R 100exp^ oo
4
^ oo
2
t
1 with ^ oo
4
r
2
t
1.8850.043
408 M. L. Higgins et al.
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then instrumented with the nonparametrically estimated
conditional variance ^ oo
2
it
.
The results of the IV estimation are presented in the nal
column of Table 3. The statistical and economic signi-
cance of the coecients are similar in the two specications
with the exception of the coecient on the risk term. The
coecient on exchange-rate uncertainty increases by about
25%. This coecient suggest that a one standard deviation
increase in risk reduces per immigrant remittances by
10%.
7
This compares to the earlier estimate of an 8%
decline. The remaining variables tend to have coecient
estimates similar to those obtained in the xed eects
non-IV estimation.
VI. CONCLUSIONS
Empirical results for a set of nine Western Hemisphere
nations gives support to Chandavarkars presumption
that on the whole, the macroeconomic policy framework
in the labor exporting countries seems adequate to induce
large ows of private remittances as an alternative to
their being spent or saved abroad (1980, p. 38). It is
found that real home country income per capita, host
country unemployment rates and the level of uncertainty
in real exchange rates are determinants of the immi-
grants decision to remit a part of his earnings back
home.
7
%R 100exp^ oo
4
r
2
t
1 with ^ oo
4
r
2
t
2.3870.041.
Table 3. Estimates of real remittances per immigrant equation
LogR
it
o
i
o
1
U
US.t
o
2
LogY
it
o
3
E
it
o
4
^ oo
2
it
o
5
Pol
it
j
it
2
LogR
it
o
i
o
1
U
US.t
o
2
LogY
it
o
3
E
it
o
4
r
2
it
o
5
Pol
it
c
it
6
Fixed eects non-IV
estimation Equation 2
Fixed eects IV
estimation Equation 6
o
1
0.088* 0.085
(0.052) (0.053)
o
2
2.122** 2.341**
(1.052) (1.055)
o
3
0.0003 0.0006
(0.0018) (0.0018)
o
4
1.885** 2.387**
(0.599) (0.798)
o 0.236 0.236
(0.291) (0.296)
o
BOLIVIA
14.623** 16.121**
(6.918) (6.931)
o
COLOMBIA
12.773* 14.196**
(6.870) (6.853)
o
DOMINICAN
12.688* 14.302*
(7.544) (7.556)
o
SALVADOR
12.058 13.681*
(7.642) (7.657)
o
GUATEMALA
12.528 14.135*
(7.54 7) (7.562)
o
HONDURAS
11.531* 12.971*
(6.783) (6.795)
o
JAMAICA
13.672* 15.275**
(7.574) (7.579)
o
MEXICO
14.558* 16.303*
(8.391) (8.413)
o
PERU
12.971 14.709*
(8.044) (8.056)
R
2
(adjusted) 0.75 0.71
N 114 114
Notes: Standard errors in parentheses.
* Denotes signicance at 10% level while ** denotes signicance at 5% level.
Exchange rate uncertainty and workers remittances 409
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The econometric analysis was conducted without using
a parametric model for exchange-rate uncertainty. In
addition, an IV procedure was used to consistently estimate
the impact of exchange-rate uncertainty in the presence of
any remaining error in the measurement of uncertainty.
The results suggest that a one standard deviation increase
in risk reduces per immigrant remittances by 10%. Migrant
workers are sensitive to the potential economic returns
that their remittances may have while parked in their
countries of origin. These results also give credence to the
new economics of migration approach which attributes
migratory ows to investment motives. It is shown that if
the ow of remittances across national boundaries is to be
better understood, it is necessary to view these ows more
broadly, as contributing to the portfolios of immigrants
assets and not simply as altruistic payments to family
members back home.
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APPENDIX: DATA
1. Remittances are obtained from the Balance of Payment
Statistics Yearbook published by International Monetary
Fund. For some years, the data are extracted from
the World Development Indicators CD issued by World
Bank. The remittances for most of the countries are
expressed in US dollars.
2. Stock of immigrants. To calculate the stock of immi-
grants in the USA for each Latin American country, the
following procedure was used: The US Immigration and
Naturalization Service Statistical Yearbook reports on the
annual ow of immigrants to the USA by country of
birth. These are immigrants who have legally entered the
USA or have adjusted their status in that year. The US
Population Census reports on the stock of foreign-born
population by region and country. For those countries in
the sample that have a time span starting before the year
410 M. L. Higgins et al.
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1990, the 1980 census data is refered to. The immigrant
ow for each year is added to the 1980 stock of foreign-
born population. For example: the stock of immigrants in
the USA from Mexico for the year 1981 is equal to the
stock of the Mexican population living in the USA in
1980 (obtained from the 1980 decennial census) plus the
1981 ow of Mexican immigrants (obtained from the
INS Statistical Yearbook). In order to calculate the stock
for 1982, the ow of Mexican immigrants in 1982 is added
to the stock for 1981. For those countries in the sample
whose series began in 1990 or later, the necessary calcula-
tions are made using the initial stock of immigrants
reported in the 1990 census. After obtaining the stock of
immigrants for each year and for each country, the number
of temporary workers, trainees, and intercompany
transferees is added for that year. They have been consid-
ered as temporary workers and for this reason they are
added to the stock of immigrants only for that year they
were accepted in the USA. Illegal immigrants are not
specically considered in this calculation, insofar as they
are not contained in the annual INS reports. However, they
are contained (presumably) in the decennial census counts.
It may be a problem if illegal immigrants are under-
estimated, as they may be a major source of remittances.
Another criticism of the procedure is that return migration
has not been considered.
3. The data for Gross Domestic Product, export and import
of goods and services, price level, population and US
unemployment rate have been extracted from World
Development Indicators CD issued by the World Bank.
The monthly exchange rate series are obtained from
the International Financial Statistics CD issued by the
International Monetary Fund.
4. The data for political risk are taken from the Freedom
House, an annual survey of freedom country ratings.
The variables reported in this survey are: political rights,
civil liberties and freedom status. With regard to political
rights, the survey attempts to assess the degree to
which citizens participate in the political process. The
degree of civil liberties is gauged by the ability of citizens
to develop view, institutions, and personal autonomy
apart from the state (www.freedomhouse.org). Political
rights and civil liberties are measured on a one-to-seven
scale, with one representing the highest degree of freedom
and seven the lowest. The variable freedom status is a
composite of the political rights and civil liberties
indexes. Countries whose combined averages for political
rights and for civil liberties fall between 1.0 and 2.5 are
designated free between 3.0 and 5.5 partly free and
between 5.5 and 7.0 not free. In constructing the
dummy variable, these were further collapsed into two
categories: D1 if Freedom House designated the country
during the year to be free while D0 if Freedom House
designated the country during the year to be partly free
or not free.
5. The terms of trade are the net barter terms of trade
obtained from the World Bank. The authors are grateful
to Eric Swanson for providing these data.
Exchange rate uncertainty and workers remittances 411
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