Smooth operator: remittances and household consumption during fiscal shocks

Abstract

Abstract With 250 million migrants globally, remittances are one of the major sources of income in many developing countries. While there is abundant evidence that remittances facilitate consumption smoothing, the literature has not considered whether this effect varies with the fiscal stance and during fiscal shocks. Our focus is therefore on whether the consumption-smoothing effect changes with fiscal policy phases and whether remittances and government support are substitutes or complements in stabilizing household consumption. We take a holistic approach to investigating this relationship combining cross-country and household-level analysis. We find that remittances help smooth consumption, and hence improve welfare, more during fiscal consolidation episodes, while this impact is insignificant during fiscal expansions. The results also indicate that the effect is more pronounced in countries with greater reliance on remittances.