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Maurizio Bussolo and Denis Medvedev Development Prospects Group

Do remittances have a flip side? A general equilibrium analysis of remittances, labor supply responses and policy options for Jamaica. Maurizio Bussolo and Denis Medvedev Development Prospects Group. Outline. What is the “flip side”? Effects of remittances Model setup

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Maurizio Bussolo and Denis Medvedev Development Prospects Group

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  1. Do remittances have a flip side? A general equilibrium analysis of remittances, labor supply responses and policy options for Jamaica Maurizio Bussolo and Denis Medvedev Development Prospects Group

  2. Outline • What is the “flip side”? • Effects of remittances • Model setup • Description of simulations • Main findings • Sensitivity analysis • Conclusions

  3. 1. What is the “flip side”?

  4. 1. What is the “flip side”? Average Weekly Real Wage (CPI, 1995=100)

  5. 1. What is the “flip side”?

  6. 2. Effects of remittances • Similar to aid flows? (Connell and Brown, 2005) • What about labor supply? • Endogeneity problems • In Mexico, the sign varies (Amuedo-Dorantes and Pozo, 2005) • In Nicaragua and Philippines – negative sign (Funkhouser, 1992; Rodriguez and Tiongson, 2001) • In Jamaica – negative sign (Kim, 2006)

  7. 3. Model setup • Single-country CGE model • Comparative statics • Nested CES production structure • Freely mobile factors • Savings-driven investment • Armington assumption • Endogenous labor supply

  8. 3. Model setup

  9. 3. Model setup • Single-country CGE model • Comparative statics • Nested CES production structure • Inter-sectoral factor mobility • Savings-driven investment • Armington assumption • Endogenous labor supply

  10. 3. Model setup Maximize subject to

  11. 3. Model setup

  12. 4. Description of simulations • Simulation a): 10 percent increase in the level of remittances with respect to their 2002 value • Simulation b): simulation a) plus 25 percent reduction in payroll taxes • Simulation c): simulation b) plus compensatory sales taxesto get a public revenue-neutral policy response

  13. 5. Main results: simulation a) -3,822 -4,563

  14. 5. Main results: simulation a)

  15. Simulation a Simulation b 5. Main results: simulation b) -3,822 -4,563 -1,061 -2,424

  16. 5. Main results: simulation b) Simulation a Simulation b

  17. Simulation a Simulation c 5. Main results: simulation c) -3,814 -4,552 -808 -2,052

  18. 5. Main results: simulation c) Simulation a Simulation c

  19. 6. Sensitivity analysis

  20. 6. Sensitivity analysis

  21. Simulation a Simulation c 6. Sensitivity analysis -6,7903,200 -11,048 1,848

  22. 6. Sensitivity analysis Simulation a Simulation c

  23. 7. Conclusions • Remittances are not “bad” • “Flip side” • Competitiveness • Dynamic consequences • Policy may help • Tax shift • Distributional effects

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