The Effect of OFW remittances on the trade balance in the Philippines through the real exchange rate channel

• Main Authors: Diaz, Mervie, Que, Deborah, Tech, Marie Blesee, Tiu, Alan James
• Format: text
• Language: English
• Published: Animo Repository 2006
• Subjects: Emigrant remittances > Philippines; Foreign exchange rates > Philippines; Balance of trade > Philippines; Filipinos > Employment > Foreign countries
• Online Access: https://animorepository.dlsu.edu.ph/etd_honors/265
• Institution: De La Salle University

Remittances sent by overseas Filipino workers have been one of the major sources of foreign exchange and income for the Philippine economy. Utilizing the Dutch disease theory, this paper examines the impact of remittance inflows on the Philippine real exchange rate. The impact of real exchange rate fluctuations on the Philippine trade balance is also examined. Based on quarterly data for the period 1991 to 2005, the results of the study reveal that for the case of the Philippines, an increase in remittance inflows leads to an appreciation of the real exchange rate, as predicted by the Dutch disease theory. Furthermore, using a cointegrating vector error correction model, we also find that an appreciation of the real exchange rate leads to the deterioration of the trade balance.