a1 Massachusetts Institute of Technology
This article argues that the international financial consequences of immigration exert a substantial influence on the choice of exchange rate regimes in the developing world. Over the past two decades, migrant remittances have emerged as a significant source of external finance for developing countries, often exceeding conventional sources of capital such as foreign direct investment and bank lending. Remittances are unlike nearly all other capital flows in that they are stable and move countercyclically relative to the recipient country's economy. As a result, they mitigate the costs of forgone domestic monetary policy autonomy and also serve as an international risk-sharing mechanism for developing countries. The observable implication of these arguments is that remittances increase the likelihood that policy makers adopt fixed exchange rates. An analysis of data on de facto exchange rate regimes and a newly available data set on remittances for up to 74 developing countries from 1982 to 2006 provides strong support for these arguments. The results are robust to instrumental variable analysis and the inclusion of multiple economic and political variables.
For helpful feedback, I thank Pablo Acosta, David Bearce, Adam Berinsky, Mark Copelovitch, Jeff Frieden, Alexandra Guisinger, Jens Hainmueller, Devesh Kapur, David Leblang, Gabriel Lenz, Federico Mandelman, Prachi Mishra, Layna Mosley, David Nickerson, Jim Snyder, James Vreeland, Stefanie Walter, Dean Yang, and the co-editors and anonymous reviewers. I thank Rachel Wellhausen and Joyce Lawrence for excellent research assistance. Earlier versions of this article were presented at the second annual International Political Economy Society conference and seminars at the Bangko Sentral ng Pilipinas, Duke University, the Federal Reserve Bank of Atlanta, George Washington University, Georgetown University, Massachusetts Institute of Technology, University of Pittsburgh, and the College of William and Mary. I thank the American Academy of Arts and Sciences for administrative and financial support.