Journal of Economics and Management Volume 18, No. 1 March, 2022

Remittances, Financial Development and Real Exchange Rates in SSA: A Reverse Dutch Disease

John Bosco Nnyanzi

Department of Economic Theory and Analysis, School of Economics, College of Business and Management Sciences, Makerere University

Nicholas Kilimani

Public and Environmental Economics Research Centre (PEERC), University of Johannesburg, South Africa

John Bosco Oryema

Department of Economic Theory and Analysis, School of Economics, College of Business and Management Sciences, Makerere University

Abstract

The paper examines the effect of remittances and financial development on the real exchange rate in eight selected countries from Sub-Saharan Africa during the period from 1980–2018. The results from the Autoregressive Distributed Lag model, estimated using a pooled mean group estimator, reveal that remittances generate a depreciation effect. This confirms the existence of a reverse Dutch disease effect where remittances support export competitiveness via the real exchange rate mechanism in the long-run. In identifying the channels through which remittances affect real exchange rates, we find that financial integration, financial development as well as trade liberalization are key in mediating the observed remittance-real exchange rate linkage. These findings are in line with the literature on the effect of floating exchange rates – a key ingredient of liberalization in dampening real exchange rate appreciation that is induced by capital flows. The findings are vital and relevant for policy makers and scholars interested in dynamic capital flow movements as well as exchange rate dynamics and overall management of small open economies.

Keywords：Remittances, Real Exchange Rate, Dutch Disease, ARDL, SSA.

JEL Classifications：F0, F4, F24,F31,O1,O10.

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