Has the sovereign debt crisis changed the cyclicality of Portuguese remittances?

ABSTRACT

This paper explores the cyclicality of remittances into Portugal from 1996 to 2015. Using bilateral correlations and econometric model regression approaches, we investigate if remittances are countercyclical or procyclical with Portuguese, French and Swiss outputs (France and Switzerland being the two main remitting countries). We also examine the ability of remittances to smooth macroeconomic shocks, and compare their role with other external financial sources. The empirical results suggest that the sovereign debt crisis has changed the cyclicality of remittances from procyclical in relation to Portuguese GDP in the years before the crisis to countercyclical during the crisis period. This conclusion is valid regardless of the economic situation of home and host countries and is robust to the use of different statistical information to measure the business cycle of Portugal (GDP, private consumption, or unemployment rate). Thus, we conclude that remittances received by Portuguese households played an economic stabilization role in the crisis years.

KEYWORDS:

• Migration
• remittances
• cyclicality
• sovereign debt crisis
• Portugal

JEL CLASSIFICATION:

• E32
• F22
• F24

Acknowledgments

The authors are grateful to the anonymous referees of this journal for their helpful comments. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. According to the World Bank, the true total amount of remittances, including unrecorded flows through formal and informal channels, is significantly larger.

2. http://www.bportugal.pt/EstatisticasWeb/(S(30hwbcv5zcrqjm45r1tbcyr4))/SeriesCronologicas.aspx. Monthly data are available, and these were summed to obtain the quarterly and annual data. The remittance inflows are accounted for in the current account, secondary income account, under the heading of ‘remittances of immigrants/emigrants’.

3. In 2009 and 2010 there is information available concerning only permanent emigration.

4. The literature suggests several techniques for filtering, of which the BK filter is one of the most popular, being appropriate from a theoretical point of view (Stock and Watson 1998). See Canova (2007) for a useful survey and discussion about the decomposition of a series into cyclical and trend components.

5. The correlation between the estimated coefficients of the GDP cycles of France and Switzerland is high (−0.7). As the variance inflation factor (VIF) for these variables don’t exceed the rule of thumb of 10, we considered that multicollinearity is not a concern.

6. We investigated the effect of EMU membership on Portuguese remittance inflows using a dummy variable taking the value 1 in the years after 1999, but it was not statistically significant.

7. The original data for these variables come from Banco de Portugal [Bank of Portugal] (2016). Private consumption is expressed in millions of euros, at 2011 constant prices, and was put in logarithmic form before its cyclical component was extracted. In the case of the unemployment rate, it was not necessary to work with logarithms.

8. The original quarterly data for the GDP of the EA are expressed in millions of euros, at 2010 constant prices, and are obtained from the Eurostat database (http://ec.europa.eu/eurostat/data/database). We converted the series into 2011 constant prices and took the logarithmic form to estimate the EA’s business cycle.

Additional information

Funding

This work was supported by national funds provided by the Portuguese Foundation for Science and Technology (FCT) [project number UID/SOC/04011/2013].