The Impact of Remittances on the Trade Balance: Empirical Evidence from North Macedonia

Abstract

The impact of remittances on various economic indicators has been analyzed for many developing countries, however, there is little evidence about their impact on the trade balance. For North Macedonia, remittances play an important role because they completely compensate the trade deficit, but on the other hand these remittances are expected to affect the trade deficit, because a large part of these remittances is oriented for further consumption. This paper aims to examine the impact of remittances on North Macedonia's trade balance using quarterly data for the period Q12003-Q32019. Like many developing countries, North Macedonia's economy relies heavily on remittance flows making it an interesting laboratory for the research question at hand. We differentiate between formal remittances, as measured by workers' compensations and informal remittances, as measured by private current transfers. We find that private current transfers have a significant impact and improve the trade balance, whereas workers' compensation significantly worsens the trade balance. In addition, our results show that inflation worsens the trade balance and past trade rates themselves affect current trade rates. These results point to the need for a more accurate measure of remittance flows in official statistics to be able to capture the full extent of their impact in various economic indicators of a country.