The Mutual Relationship between Real Exchange Rate Volatility and Remittances Volatility in Selected Developing Countries: A Simultaneous Equations Approach

In many emerging and developing economies, sudden changes and volatilities in the exchange rate can be negatively affect economic growth by decline in investment, trade balance and profitability. Considering the fact that these economies are vulnerable to changes in capital inflows; remittances as one of the most important capital and financial inflows can lead to volatility and uncertainty in the exchange rate of developing countries and cause instability in the economy. Thus In this study, the mutual relationship between real exchange rate volatility and remittances volatility has been investigated and empirically analyzed by the use of Generalized Autoregressive Conditional Heteroskedasticity (GARCH) and three stage least square (3SLS) of simultaneous equations system approaches in the selected developing countries including Iran over the period 1980-2015. The results demonstrate that there is a relationship between the real exchange rate and remittances volatilities. In the meanwhile, the exchange rate volatility has a greater and significant effect on the volatility of remittances; while their reverse effect is small. In other words, the remittances volatility does not have a significant effect on the exchange rate volatility, which leads to economic stability. In addition, foreign direct investment, government spendings and trade openness cause volatilities in real exchange rates, and on the other side, inflation, financial development, household expenditure per capita and age dependency are the influential factors of remittances volatility in the studied countries.