Abstract:
This paper investigates the effect of remittance inflows on real exchange rates in sub-Saharan Africa
(SSA) using annual data from 1980 to 2008 for 34 countries, the method of moments estimator
developed by Arellano and Bover (1995) and the feasible generalized least squares estimator developed
by Parks (1967) and Kmenta (1986). We find that when cross-sectional dependence and
individual effects are controlled for, remittances to sub-Saharan Africa as a whole increase the underlying
real exchange rates of recipient countries. However, this real exchange rate appreciation is
mitigated by monetary policy interventions and the direction of fiscal expenditures towards tradable
goods. Thus, the real exchange rate appreciation does not lead to the loss of export competitiveness
or a worsening of the trade deficit in the countries in the panel.
