Essays on the roles of remittances and oil prices in an oil importing developing economy

Abubakar, Muhammad (2024) Essays on the roles of remittances and oil prices in an oil importing developing economy. PhD thesis, University of Nottingham.

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This thesis investigates the effects of oil price fluctuations on oil-importing economies that heavily rely on remittances originating from oil-producing countries, using Pakistan as a case study. Pakistan is one of the largest exporters of labour (both skilled and unskilled), especially to the Gulf region, and is the recipient of substantial remittance inflows, which are notably high compared to foreign direct investment. The economic implications of oil prices and remittances have been extensively studied separately. However, despite the crucial link between the two, few studies capture both elements within the same model.

The first essay takes a lead in the literature by incorporating the role of oil prices and remittances within a New Keynesian environment, with the prime objective to understand the dynamics of remittances in the economy of Pakistan. Results depict that fluctuations in oil price have a positive and substantial impact on remittance inflows. Moreover, an increase in oil prices contracts output immediately in the absence of remittances and with a lag of two quarters when remittances are present; the contraction is more severe in the former case. As expected, an oil price shock depreciates the exchange rate; depreciation is significantly greater when endogenous remittances are absent. With remittances stabilising the exchange rate, the inflationary impact of an oil price shock is much less severe. Moreover, remittances play an essential role in compensating for the negative impact of oil prices on the current account.

After establishing that remittances play a stabilizing role against an oil price shock, the second essay provides a sensitivity analysis to find out the parameter values to which the model is most sensitive to. The analysis shows that the remitting motive plays an important role in determining the dynamics as well as the outcome of an oil price shock. When the economy is hit by an oil price shock, remittances driven by self-interest fall. This further exacerbates the situation as the economy suffers a dual shock. Contrary to this, when remittances are motivated by altruism, migrants send more flows to support their families back home. Thus, remittances act as a strong automatic stabiliser as both components of remittances (one linked with the host economy and the other linked with the home economy) increase. In contrast to altruistic flows, when remittances are motivated by self-interest, the economy becomes unstable when the share of migrant households becomes sufficiently small or sufficiently large.

The findings of the first two essays, which are based on a theoretical model, suggest that the role remittances play in the economy is conditional on the motivation of migrants to send money back home. The third essay empirically examines the impact of remittances on a developing economy, taking into account the motives of migrants for sending remittances. Accordingly, a structural vector error correction model (SVECM) is estimated for Pakistan using monthly data from July 2009 to December 2019. We identify three stable cointegrating vectors: the money demand function, a relation for real output, and a policy rule. We find that remittances increase in response to an output shock, indicating a self-interest motive. Remittances are substituted for labour income, and thus affect output growth adversely. However, in the long-run, remittances promote output growth by alleviating credit constraints and being channelized for investment into real assets. The evidence of the Dutch disease phenomenon is not found given the central bank’s focus on exchange rate stabilization. Remittances expand real money balances at impact but lead to contraction in the long run. Impulse response functions for a shock to remittances computed under a theoretical model (with the assumption of a self-interest motive) closely match those obtained from the empirical model.

Item Type: Thesis (University of Nottingham only) (PhD)
Supervisors: Teo, Wing Leong
Morozumi, Atsuyoshi
Keywords: remittances, oil price shocks, Gulf Cooperation Council (GCC), labour export, Pakistan's economy, dynamic stochastic general equilibrium (DSGE), new Keynesian model, sensitivity analysis, structural vector error correction model (SVECM), remitting motives, cyclicality of remittances, macroeconomic stability, economic growth, economic dependency, economic diversification
Subjects: H Social sciences > HG Finance
Faculties/Schools: University of Nottingham, Malaysia > Faculty of Arts and Social Sciences > School of Economics
Item ID: 74234
Depositing User: Abubakar, Muhammad
Date Deposited: 09 Mar 2024 04:40
Last Modified: 09 Mar 2024 04:40

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