A Theoretical Approach in Explaining the Impact of Remittances on the Macroeconomy: Evidence From an Overlapping Generations Model for the Philippines

Abstract

Despite the constraints posed by the coronavirus pandemic on the global movement of migrant workers, cash remittance inflows remained to be a significant component of the Philippine economy. It still comprises a significant proportion of the economy’s gross domestic product and exceeds the influx of overseas development assistance and foreign direct investments. On top of the various empirical studies discussing the effects of remittances on the macroeconomy, I took the theoretical approach in explicating its impact on the macroeconomy. Through a micro-founded macro-model overlapping generations model, I trace the effects of remittances on the path of steady-state aggregate income, capital accumulation, and consumption. Calibration results indicated that remittances increase steady-state consumption of remittance-recipient households, stimulate growth in steady-state aggregate income, and drive faster capital accumulation. Such results call for policymakers to revisit policies to manage remittances in light of their economic effects.