Abstract

An exogenous inflow of foreign exchange can lead to an appreciation of the currency of the receiving country, a deterioration of its competitiveness and a fall in net exports. Economic theory identifies this as the “Dutch Disease” although it is more often observed in emerging economies. The origin of the real exchange rate appreciation can differ from country to country but the inflow of remittances, the main and clearer gain for the emigration countries, has been accused for such an outcome. This paper tests the applicability of the “Dutch Disease” for two small transition economies under a free floating exchange rate regime, namely Albania and Moldova. In recent years, these countries have experienced impressive outflows of emigrants and even more impressive inflows of remittances. However, the econometric results, based on the ordinary least squares fixed effects, show that the impact of the workers’ remittances on the real exchange rate varies among the countries examined. The results confirm that the macroeconomic implications of these large capital inflows have been actually different between the countries.

Authors and Affiliations