Emigrant Remittances and the Real Exchange Rate in Guatemala: An Adjustment-Costs Story

Resumen

Emigrant remittances have been growing around the world since 1970, but in the past few years their growth rate has enlarged signicantly. In Guatemala, remittances have increased more than four times as a share of the GDP over the last decade and this trend has coincided with an appreciation of the real exchange rate. In this paper, we develop a stochastic, dynamic, general equilibrium model, useful to explain the determinants of the real exchange rate. We study the relationship between the real exchange rate and the demand side of the economy; specically, its relationship with remittances in a fully optimizing model. Our model includes adjustment costs for capital intended to capture an equilibrium real exchange rate compatible with the short run conditions and it generates a short-run equilibrium real exchange rate appreciation, a tradable sector contraction, and a nontradable sector expansion, similar to those that are observed in national accounts data. The results also suggest that, in Guatemala, economic agents perceive the observed shift in the remittances ow as permanent.