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Applied Financial Economics
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Exchange-rate uncertainty and workers' remittances
Matthew L. Higgins
a
, Alketa Hysenbegasi
b
& Susan Pozo
a
a
Department of Economics , Western Michigan University , Kalamazoo, MI 49008 USA
b
Risk Management , Citi Cards , One Court Square, Long Island City, NY 11120 USA
Published online: 02 Feb 2007.
To cite this article: Matthew L. Higgins , Alketa Hysenbegasi & Susan Pozo (2004) Exchange-rate uncertainty and workers'
remittances, Applied Financial Economics, 14:6, 403-411, DOI: 10.1080/09603100410001673630
To link to this article: http://dx.doi.org/10.1080/09603100410001673630
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Exchange-rate uncertainty and workers
remittances
MATTHEW L. HIGGINS, ALKETA HYSENBEGASIz and
SUSAN POZO*
Department of Economics, Western Michigan University, Kalamazoo, MI 49008
USA and zRisk Management, Citi Cards, One Court Square,
Long Island City, NY 11120 USA
A panel of nine Western Hemisphere nations is employed to test the proposition that
the remittances of immigrants respond to risk variables, in particular to exchange-
rate uncertainty. To estimate annual exchange-rate uncertainty, a nonparametric
estimator based on monthly exchange rate returns is used. Also the instrumental
variables procedure of Pagan and Ullah (Journal of Applied Econometrics, 3, 87105,
1988) is employed to insure that the conclusions are robust to possible error in the
measurement of exchange-rate uncertainty. The results give credence to the new
economics of migration approach which argues that immigrants are highly moti-
vated by portfolio variables.
I. INTRODUCTION
A number of studies have set out to examine the impact of
relative rates of return on the level of workers remittances.
Many of these studies nd evidence that immigrants are
responding to portfolio variables, sending larger levels of
remittances to their countries of origin when home rates
of return rise (Straubhaar, 1986; Faini, 1994; El-Sakka
and McNabb, 1999). However, none of the studies have
included risk variables as determinants of remittances
ows. Though these studies are making the case that
migrating workers are behaving as investors, they all
implicitly assume that migrants are risk neutral in their
preferences with respect to risk and return.
The absence of risk variables in the modelling of migrant
worker investment behaviour is inconsistent. It is proposed
to overcome this deciency in the literature by incorporat-
ing risk variables into a model explaining the level of
remittances. It is assumed that migrant workers have the
option to make investments in the host country and in the
home country and changes in the relative riskiness of
home/host country investments alter the portfolio mix of
the remitter. Unlike previous nance papers that have
potentially mismeasured exchange-rate risk, a nonpara-
metric estimator of this risk is employed based on higher
frequency data. To further insure the validity of the results,
the instrumental variables (IV) estimator of Pagan and
Ullah (1988) is used which allows consistent estimation of
the impact of exchange-rate risk when the risk is measured
with error. Use is also made of information on political risk
and an attempt to correlate these risks to remittances ows
is made. Signicant impacts of exchange-rate uncertainty
on the level of remittances is found. Increases in exchange-
rate uncertainty appear to reduce remittances sent to the
home country. However, political risk is not found to
aect the level of remittances.
II. OVERVIEW
There is no denying that workers remittances are an
important source of foreign exchange earnings for a
*Corresponding author. E-mail: susan.pozo@wmich.edu
Applied Financial Economics ISSN 09603107 print/ISSN 14664305 online # 2004 Taylor & Francis Ltd
403
http://www.tandf.co.uk/journals
DOI: 10.1080/09603100410001673630
Applied Financial Economics, 2004, 14, 403411
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number of countries. In Table 1, the ratios of remittances
to GDP, remittances to exports of goods and remittances
to exports of services are displayed using 1996 data for
a sample of nine Western Hemisphere nations. The level
of remittances with respect to each of these economic
variables is fairly high for El Salvador, Jamaica, and the
Dominican Republic. Though less dramatic for the other
countries in this sample, the gures do suggest that
remittances are a potentially signicant factor in these
economies and a more complete model of the determinants
of remittances may be of some value in understanding these
economies and the resources that are available to them.
Lucas and Stark (1985) were the rst to consider a
formal approach to quantifying the potential motives of
migrant workers with respect to their remittances. In
their analysis they hypothesized that migrant workers
could be motivated in a variety of ways, ranging from
pure altruism to self-interest. By relating the impact of
home family income to remittances, they suggest that the
overriding motive of the migrant family member can be
discerned. Migrant workers
1
would be classied as altruis-
tic if remittances rise with declines in their familys income,
while self-interest motives would be considered consistent if
a positive relationship between remittances and the remit-
ters familys income is observed. This approach has been
widely adopted by researchers in the area who work with
individual level data. The papers by Agarwal and Horowitz
(2002), and Ilahi and Jafarey (1998), represent alternative
tests of the altruistic/self-interest hypothesis. While Lucas
and Stark nd support for the self-interest motive, Agarwal
and Horowitz favour the altruistic motive and Ilahi and
Jafareys data favours the self-interest motive.
Researchers have also tried using aggregate data to
isolate the set of macroeconomic factors that aect the
behaviour of remitters. It has been hypothesized that
exchange-rate levels, income, ination, and relative rates
of returns are factors that potentially explain the ups and
downs of remittance ows (Straubhaar, 1986; Faini, 1994;
El-Sakka and McNabb, 1999). This line of reasoning is
carried further by considering another dimension that
investors may consider the relative riskiness of alternative
investments.
The idea that immigrant workers are motivated by
investment variables squares well with the new economics
of migration literature. In this literature immigrant work-
ers are recognized to also be motivated by the desire to
accumulate capital for home country investments in hous-
ing, businesses or land. This approach departs from
the more traditional view, that immigration is primarily
determined by dierential wage rates or by dierential
expected stream of future incomes (see Stark and Bloom,
1985; Massey and Espinosa, 1997). If the investment
motive is an important determinant of migration, it
seems logical that these same migrants are motivated by
investment variables when allocating earnings and assets
across national boundaries.
Though dierential rates of return have been incorpo-
rated in some studies of remittances, none have tested
the proposition that risk variables aect the ow of
remittances. In this paper risk variables are specically
considered as a possible determinant of the level of
per-immigrant remittances by receiving economies.
III. THE ECONOMIC DETERMINANTS OF
REMITTANCES
To investigate the nancial determinants of remittance
ows a panel is constructed using data from nine
Western Hemisphere nations: Bolivia, Colombia, the
Dominican Republic, El Salvador, Guatemala, Honduras,
Jamaica, Mexico, and Peru. The inclusion of the nine coun-
tries is justied in a variety of ways. First, given that the
USA has experienced signicant levels of migratory ows
from the Western Hemisphere, it is observed that overall
there are large remittance ows from the USA back to the
nine home countries. To test the hypotheses regarding the
determinants of remittances and in particular the impact
of risk variables, it is useful that this large established base
of foreign workers in the USA can be relied on. It allows
remittances to be correlated not only to home country
1
The terms immigrant worker and migrant worker are used interchangeably. While the term migrant worker is often reserved for
workers who move from one geographic region to another within one country to take advantage of the availability of work, the terms
migrant and immigrant worker are used here to refer to individuals who are working in a country other than their country of origin.
Table 1. Workers remittances (R) relative to GDP, exports and
imports
a
Country R/GDP R/goods exports R/service exports
Bolivia 0.03 0.19 1.16
Colombia 0.16 1.32 3.58
Dominican Rep. 6.37 21.37 39.72
El Salvador 10.48 60.76 262.07
Guatemala 2.39 16.78 67.16
Honduras 3.20 7.84 45.32
Jamaica 15.61 36.93 44.68
Mexico 1.28 4.40 38.75
Peru 0.66 6.85 28.56
Notes:
a
Remittances, GDP, exports of goods and services,
and imports of goods and services are annual levels for 1996.
They are derived from nominal values and expressed in US
dollars.
404 M. L. Higgins et al.
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variables, but also to host country variables. In general,
the connection between risk levels and the volume of
remittances is dicult to capture without identifying the
source country of each remittees payments. But the aggre-
gate data available on remittance ows (total workers
remittances inows as reported by central banks) does
not identify the source country of these ows. Such data
are not available in large quantities. But for these nine
Latin American countries it is argued that it is reasonable
to assume that (nearly) all the remittances reported in the
balance of payments of the home countries originate from
expatriate workers residing in the USA.
An additional reason for including these nine nations
in the panel revolves around the issue of political and eco-
nomic stability. These countries are prone to episodes of
nancial crises, high ination, changing exchange rate
regimes and other instabilities including political instabil-
ity. High variability in these factors make these countries
ideal for investigating the impact of nancial variables
on remittances. That is, this variability facilitates the
isolation of these factors as explanatory variables for
tracking the ups and downs of remittance ows. In sum,
it is expected that the analysis will provide a better
explanation of the eects of macroeconomic and nancial
factors on remittances and shed light on the possible
negative relationship of political and economic uncertainty
on workers remittances.
The panel is unbalanced. Though an attempt was made
to gather information from 1970 through 1997, data
limitations with respect to individual countries forced the
use of dierent sample periods for each nation. Hence for
Colombia the time span is 19701997, but for Guatemala
only information from 1990 through 1997 could be
included. The sample periods are specied for each of the
nine countries in the panel in Table 2. The frequency of
the data summarized in Table 2 is monthly and is used to
estimate an uncertainty proxy. The nal analysis is carried
out using annual data.
A combing of the literature suggests that a reduced form
equation of the determinants of remittances will incor-
porate the following variables. A measure of the ability
of the migrant worker to remit sums home, a measure of
the economic well-being in the home country, and the
exchange rate between the sending and receiving country.
As discussed earlier, it is reasoned that an additional set of
variables should be incorporated: economic and nancial
risk variables. Hence, it is hypothesized that the following
general model applies:
R f U. Y. E. o
2
. Pol 1
with R representing per immigrant remittances, U and Y as
indicators of economic conditions in the host and the home
countries, E as the bilateral real exchange rate, o
2
as uncer-
tainty in real exchange rate returns, and Pol as political
risk. Discussion of each of these variables follows.
The greater are the resources of the migrant worker in
the host country, the more likely s/he will have met her/his
physical needs and can therefore save and remit to the
home country. In the specication used the unemployment
rate in the USA(U) is employed as an indicator of the
ability of the immigrant worker to remit sums home.
Given that immigrant workers are somewhat marginalized
it is reasoned that the unemployment rate is likely to bet-
ter (relative to GDP growth) reect the income generating
opportunities of immigrant workers.
Let Y represent income in the home country. There
are two separate rationales for incorporating economic
conditions in the home country. The predicted eect of
this variable in a model of remittances depends on what
is believed are the motives of immigrant workers to remit.
If they are altruistic, downturns in the home economy will
prompt workers to make-up for shortfall in resources of
family members. Such are the ndings of Faini (1994) and
Glytsos (1997). If, on the other hand, immigrant workers
are self-interested, remittances will respond positively to
economic conditions in the home country. This second
argument was rst put forth by Lucas and Stark (1985)
who claim to nd evidence for such in their empirical
work on remittances in Botswana. They concluded that
an increase in the income of the migrants family would
(presumably) increase the amount of assets and properties
that would be available for inheriting, hence increasing
the incentive for the migrant to remit more. Moreover, as
Table 2. Descriptive statistics of monthly real exchange rate returns
Period Mean Std. dev. Skewness Kurtosis
Bolivia 1986:02-1997:12 0.0003 0.0129 1.4762 7.6736
Colombia 1970:02-1997:12 0.0034 0.0179 1.7584 16.2325
Dom Rep 1985:02-1997:12 0.0024 0.0423 0.8659 12.9218
El Salvador 1990:02-1997:12 0.0003 0.0368 6.8841 58.6688
Guatemala 1990:02-1997:12 0.0033 0.0334 3.1070 27.1584
Honduras 1990:02-1997:12 0.0064 0.1573 5.5538 59.5286
Jamaica 1976:02-1997:12 0.0015 0.0541 5.7296 52.7589
Mexico 1983:02-1997:12 0.0018 0.0454 4.1657 49.9156
Peru 1989:02-1997:12 0.0072 0.0643 1.6948 15.0138
Exchange rate uncertainty and workers remittances 405
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already suggested, if remittances are viewed as nancial
or capital investments taking place in the migrants home
area or country, favourable economic conditions in the
originating area can positively impact these investments
as they are associated with future potential growth. The
log of per capita real income in the home country (Log
Y
it
) is used to measure economic well-being in the receiving
economy. Note also that per capita income is used to
measure economic conditions in the home country, while
unemployment rates are used to measure economic well
being in the host country. This substitution is made
because reported unemployment rates are unreliable
measures of economic well-being in many of the receiving
countries in the sample used.
It is argued that the real exchange rate also has the
potential to aect the level of remittances with depreciation
of the real exchange rate encouraging the ow of resources
from the host to home country. Host country (USA)
increases in price levels will increase the ow of remittances
from the host country as immigrant workers seek to protect
against the erosion of purchasing power in the host
country. Home country price ination will have the
opposite eect, deterring the transfer of remittances back
home due to the relative increase in prices of goods and
assets there. In contrast, nominal depreciation of the
home currency will speed the ow of remittances back
home, all other things equal, due to the greater command
of resources that the dollar translates into on account of
depreciation. In fact, Hysenbegasi and Pozo (2000) suggest
that depreciation of the home currency tends to promote
remittances above and beyond what would be expected
because those depreciations were in fact anticipated.
Anticipated depreciations result in delays in remittances
to avoid capital (exchange-rate) losses, but once the
depreciation takes place, the immigrant worker will resume
and perhaps increase remittances to home getting more
credit for the transfer once depreciation takes place. This
is consistent with Wahbas (1991) claim that governments
in developing countries devalue the exchange rates to
encourage remittances inows. In combination, the three
factors rises in the US price level, declines in the home
country price level and depreciation (rises) in the nominal
exchange rate all translate into real depreciation of the
home currency and are presumed to have a positive impact
on remittance ows from the host to home country.
Relative economic and nancial risk variables should
also have an impact on remittance ows, but in the existing
literature, economic and nancial risk variables have not
yet been considered as factors that inuence remittances.
In a world of variable exchange rates, the immigrant who
invests part of his assets in his home country but whose
reference point is the purchasing power of these assets in
the USA, is exposed to exchange risk. Such should impact
his allocation decision. Exchange-rate risk and exchange-
rate uncertainty have been widely assumed to aect trade,
direct investment and portfolio investment ows. (See for
examples Goldberg and Kolstad, 1995 and Arize, 1997.)
It is reasoned that increases in exchange risk will like-
wise decrease the level of workers remittances assuming
that a part of these ows in fact are private investment
ows made by immigrants.
The hypothesis that political stability impacts immi-
grants investment activities is also tested. It is rationalized
that investors are concerned with the ease of repatriating
assets from their home to their adopted country. When
political risk rises, that is when the probability increases
that more controls will be put in place or that the prob-
ability of expropriation has risen, workers may be more
reluctant to remit sums home.
2
A qualitative dummy
variable is used to represents the degree of political risk
in the immigrants home country.
Based on the above discussion, real remittances per
immigrant, R
it
, are modelled as follows:
LogR
it
o
i
o
1
U
US.t
o
2
LogY
it
o
3
E
it
o
4
o
2
it
o
5
Pol
it
j
it
2
where i stands for individual countries and t for the years.
U
us,t
and Y
it
represent economic conditions in the USA
and in the home country.
3
E
it
represents the real exchange
rate dened such that an increase in the index corresponds
to real depreciation.
4
o
2
it
measures volatility in the real
exchange rate return. (Its construction is discussed in
the next section.) Pol
it
is a dummy variable that measures
political risk. The dummy variable takes the value 1 if the
country is evaluated as free and 0 if the country is eval-
uated as partly free or not free. The xed eects (o
i
)
capture the unobserved but time constant factors that
will aect the level of remittances. For example, the geo-
graphic distance between emigrants and their country of
origin, (which does not vary over time but does vary across
country of origin) may end up aecting the ease of sending
remittances home and hence the level of those ows.
The o
i
s are intended to pick up this unobserved country
heterogeneity.
Note that in the specication used all variables are
real. Hence ination is not included in the specication.
Relative home and host country ination are incorporated,
2
This is reminiscent of the political risk variables (probability of the imposition of capital controls) that was popular in the earlier
international nance literature. (See for example Dooley and Isard, 1980.)
3
The single index t in the US variable recognizes that this variable is time variant but invariant across individual countries.
4
E
it
(S
it
*CPI
US,t
)/CPI
it
where S
it
is the nominal exchange rate (in home currency units per US dollar). CPI
it
and CPI
US,t
are the
consumer price indexes in the home country and in the USA.
406 M. L. Higgins et al.
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however, in the real exchange rate variable. Simple interest
dierentials (dierences in rates of returns to investment
in the home and host countries) are also absent from
Equation 2. Market interest rates for a number of these
countries and for many of the selected years are not avail-
able. However, this is not viewed as a limitation since
reported interest rates in many of these countries do not
reect true asset returns, while real exchange movements
(since they tend to mimic nominal exchange rate move-
ments in the short term) should control for the shorter-
term relative cross country returns. As discussed earlier,
the behaviour of relative prices is incorporated in the real
exchange rate term and controls for the relative attributes
of host and home country assets.
IV. ESTIMATING EXCHANGE- RATE
UNCERTAINTY
It is common in the literature to see exchange-rate uncer-
tainty proxied with an unconditional measure, such as the
rolling standard deviation of exchange-rate movements.
But such a measure can be criticized on both economic
and statistical grounds. The standard deviation provides
a measure of variability in the exchange rate rather than
uncertainty (or unpredictability) in the exchange rate. But
in an economic sense, variability and unpredictability are
not one and the same. A series can be very volatile and
yet easily predicted. If the exchange rate were to depreciate
50% in even years and appreciate 50% in odd years, the
variance (unconditional volatility) of the series would be
very high and the series would be described as very vari-
able. But the described pattern suggests that such a series is
very predictable and easy to forecast. Hence, in at least one
dimension, what really matters to economic agents is the
predictability of a series. Greater predictability implies less
uncertainty.
5
On these grounds, conditional measures of
volatility that seek to measure unpredictability or forecast-
ability are superior measures of the risks and uncertainty
facing economic agents.
Exchange rate uncertainty is represented as the variance
of the exchange rate return conditional on information
observed by agents. The exchange rate return for currency
i in year t is dened as r
it
logE
it
logE
it 1.
The estimated
autocorrelations of these annual returns are not signi-
cantly dierent from zero and suggest that the returns
cannot be predicted from their own past. The sample
mean returns are also not signicantly dierent from
zero. Therefore,
E
t1
r
it
0
and
var
t1
r
it
E
t1
r
2
it
o
2
it
3
may be written where E
t1
() and var
t 1
() denote expecta-
tion and variance conditional on the information available
in the previous time period. The conditional variance o
2
it
is
the unobserved exchange-rate volatility measure. In the
literature on exchange-rate volatility, the conditional var-
iance in Equation 3 is often specied to follow the G/
ARCH(p,q) model of Engle (1982) and Bollerslev (1986):
o
2
it
,
i0
,
i1
r
2
i.t1
,
ip
r
2
i.tp
[
i1
o
2
i.t1
[
iq
o
2
i.tq
4
This model for the volatility process has been widely
used because it captures the volatility clustering and
excess kurtosis so frequently observed with high frequency
exchange rate data. Given the limited amount of data avail-
able for each country in the sample, it is not feasible to
estimate GARCH models for the annual exchange-rate
return uncertainty. There are, for example, only seven
observations on the annual exchange-rate return for El
Salvador, Guatemala and Honduras. It could be assumed
that the parameters in the conditional variance Equation
(4) are the same across countries and use the entire panel
data set to estimate a single conditional variance process.
Such a homogeneity assumption, however, would require
that the variance, kurtosis and persistence of volatility clus-
tering to be the same for each exchange rate in the sample.
Descriptive statistic for these exchange-rate returns are pre-
sented in Table 2 and indicate that such an assumption is
not valid.
As a feasible alternative to the GARCH model, the
annual exchange-rate return uncertainty will be estimated
with a nonparametric estimator which uses observed
monthly rates of return for which there are signicantly
more data. The estimator was originally introduced by
Schwert (1989) and Schwert and Seguin (1990) to calculate
monthly stock market volatility from daily stock returns.
The estimator has recently been used in a series of papers
by Andersen and Bollerslev (1998a, 1998b) and Andersen
et al. (2001) to estimate daily exchange-rate volatility from
intraday returns. Let r
mit
be the one month currency return
in month m and year t for currency i. The annual return
volatility in Equation 3 will then be estimated with
^ oo
2
it

X
12
m1
r
2
mit
5
Andersen and Bollerslev (1998b) demonstrate that this esti-
mator is consistent for a general conditional variance spe-
cication as the number of subintervals in year t increases.
For the countries in this study, monthly observations on
5
Volatility, whether predicted or not, is sure to raise economic costs to agents transacting in the market, but the costs are certainly
greater in the case of unanticipated movements of the same magnitude.
Exchange rate uncertainty and workers remittances 407
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the exchange rates are used because they were the highest
frequency available for the sample period.
Even though the estimator in Equation 5 is consistent as
the number of subintervals increase, the estimator could
still have a large sample bias because it is based on only
12 monthly observations. To insure that the results are not
sensitive to this possibility, Equation 2 was also estimated
using the instrumental variables (IV) procedure proposed
by Pagan and Ullah (1988). Although possibly inecient,
their estimator is consistent for the regression parameters
in Equation 2 even if the estimator of the conditional var-
iance in Equation 2 is biased. Their estimator can be
explained as follows. From Equation 3, E
t1
r
2
it
o
2
it
,
and therefore, r
2
it
is an unbiased proxy for o
2
it
. Then r
2
it
can be substituted for o
2
it
in Equation 2 and the model
becomes
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
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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