GRUENFELDER Tobias KESSLER Lorella

2. Remittances and Vulnerability in Developing CountriesGiulia Bettin, Andrea F. Presbitero and Nikola Spatafora GRUENFELDER Tobias KESSLER Lorella

3. How are International Remittancesaffected? • Structural characteristics • Macroeconomic conditions • Adverse shocks in both source and recipient countries • We cover bilateral remittances from • 103 Italian provinces • 107 developing counries • 2005-2011 Tobias and Lorella Remittances and Vulnerability in Developing Countries

4. Overview • Introduction • Literature Survey • Remittances from Italy to Developing Countries • Data and Empirical Strategy • Results • Conclusion Tobias and Lorella Remittances and Vulnerability in Developing Countries

5. Introduction Vulnerability Index and Capital Flows in DevelopingCountries • Developing countries extremely vulnerable to adverse exogenous shocks • Remittances in developing countries have grown steadily relative to capital flows (because of the migrants) Tobias and Lorella Remittances and Vulnerability in Developing Countries

6. Main Contributions to the literature • Availability of bilateral data for large sample of recipients ► analyze correlation between remittances and the business cycle • Deal with the possible endogeneity(correlation) of the business cycle in the recipient country ► more effective than previous studies • Investigation of the relationship between remittances and financial development in the source economy (in this case Italy) ► focused on financial development in recipient country ► remittances promote financial development (Gupta et al., 2009) Tobias and Lorella Remittances and Vulnerability in Developing Countries

7. Overview • Introduction • Literature Survey • Remittances from Italy to Developing Countries • Data and Empirical Strategy • Results • Conclusion Tobias and Lorella Remittances and Vulnerability in Developing Countries

8. Literature SurveyMicroeconomic level Motivation of remittances • Altruism-Motive (Agarwal and Horowitz, 2012) • Remittances increase to compensate relatives for negative shocks to their income • Self-interest-Motive (Bettin et al., 2012) • investment or inheritance • Positive correlation between remittances and the economic conditions of families back home Tobias and Lorella Remittances and Vulnerability in Developing Countries

9. Macroeconomic level • Studies considered a wide range of potential determinants including exchange rates ( Faini, 1994), interest rate differentials(El-Sakka and McNabb, 1991) transaction costs (Freund and Spatafora, 2008) • Many studies find that remittances are • negatively correlated with income levels in the recipient country (El-Sakka and McNabb, 1991; Bouhga-Hagbe, 2006; Singh et al., 2011) • Reducing output growth volatility in developing economies (Bugamelli and Paterno, 2011; Chami et al., 2011) • Reacting positively to natural disasters (Yang, 2008; Mohapatra et al., 2012; Ebeke and Combes, 2013) Tobias and Lorella Remittances and Vulnerability in Developing Countries

10. Overview • Introduction • Literature Survey • Remittances from Italy to Developing Countries • Data and Empirical Strategy • Results • Conclusion Tobias and Lorella Remittances and Vulnerability in Developing Countries

11. Remittances from Italy to Developing Countries • Doubled remittances from Italy to Developing Countries from 2005-2011 • Total Remittances reached almost EUR 7 billion Tobias and Lorella Remittances and Vulnerability in Developing Countries

12. Transfers from Italy by Region Tobias and Lorella Remittances and Vulnerability in Developing Countries

13. Remittances by region of destination World Italy Tobias and Lorella Remittances and Vulnerability in Developing Countries

14. Overview • Introduction • Literature Survey • Remittances from Italy to Developing Countries • Data and Empirical Strategy • Results • Conclusion Tobias and Lorella Remittances and Vulnerability in Developing Countries

15. Data and Empirical StrategyThe empirical gravity model Simple gravity model for bilateral remittances Tobias and Lorella Remittances and Vulnerability in Developing Countries

16. The empirical gravity model Tobias and Lorella Remittances and Vulnerability in Developing Countries

17. The empirical gravity model • a2 < 0 Remittances are counter-cyclical with respect to output fluctuations in the recipient country, altruistic motivations • a4 > 0 A positive correlation between remittances and the long-run output trend in the recipient country, investment motivation • β2 > 0 A positive correlation between remittances and the growth of the migrant stock Tobias and Lorella Remittances and Vulnerability in Developing Countries

18. The empirical gravity model We also examine the impact of financial development on remittances. • 1. We consider differences in financial development across recipient countries. • 2. We consider differences in financial development across Italian provinces, the source of remittances. We expect more developed provincial financial markets to be correlated with greater remittanceoutflows. Tobias and Lorella Remittances and Vulnerability in Developing Countries

19. Data Sources • Bank of Italy • ISTAT and Istituto Tagliance • WorlEconomic Outlook (IMF) • UCDP & PIRO Armed Conflict Dataset • World Development Indicators (ISTAT) Tobias and Lorella Remittances and Vulnerability in Developing Countries

20. Overview • Introduction • Literature Survey • Remittances from Italy to Developing Countries • Data and Empirical Strategy • Results • Conclusion Tobias and Lorella Remittances and Vulnerability in Developing Countries

21. Results • Remittances as a counter-cyclical financial flow • Remittances increase in response to cyclical output declines in the recipient country, CYCLEj • Remittances are 4.7 percent larger when recipient countries experienced natural disasters, and 11 percent larger in the case of a significant negative shock to the terms of trade • Remittances are also positively and significantly correlated with trend GDP per capita in recipient countries Tobias and Lorella Remittances and Vulnerability in Developing Countries

22. Results 2. Remittances and financial development • Remittances are negatively correlated with financial development in recipient countries • Remittances are positively correlated with financial development in the source province 3. Otherresults • Bilateral remittances are strongly correlated with the size of the relevant migrant community in the relevant province • The distance to migrants’ home country, DISTij , is positively correlated with remittances • The populations of both the host Italian province, POPi , and the home country, POPj , are positively correlated with remittances Tobias and Lorella Remittances and Vulnerability in Developing Countries

23. Tobias and Lorella Remittances and Vulnerability in Developing Countries

24. Tobias and Lorella Remittances and Vulnerability in Developing Countries

25. Overview • Introduction • Literature Survey • Remittances from Italy to Developing Countries • Data and Empirical Strategy • Results • Conclusion Tobias and Lorella Remittances and Vulnerability in Developing Countries

26. Conclusion • Remittances are negatively correlated with the business cycle in recipient countries, and increase especially strongly in response to adverse exogenous shocks, such as natural disasters or large declines in the terms of trade. • Remittances are positively correlated with potential GDP in recipient countries (altruism and investment motives). • Remittances are also positively correlated with economic conditions in the source province. • Remittances are positively associated with financial development in the source province,and negatively associated with financial development in the recipient country. Tobias and Lorella Remittances and Vulnerability in Developing Countries

27. Conclusion “We conclude that remittances may indeed contribute significantly to macroeconomic stability in recipient countries. This effect should be considered together with their positive impact on poverty alleviation and growth, emphasized in the existing literature.” Thank you for your attention!!! Tobias and Lorella Remittances and Vulnerability in Developing Countries

28. Discussion Tobias and Lorella Remittances and Vulnerability in Developing Countries

29. …. Tobias and Lorella Remittances and Vulnerability in Developing Countries

30. Tobias and Lorella Remittances and Vulnerability in Developing Countries

31. …. Tobias and Lorella Remittances and Vulnerability in Developing Countries