The Mutual Relationship between Real Exchange Rate Volatility and Remittances in Islamic Developing Countries (D8): A Simultaneous Equations Approach

In this study, the mutual relationship between real exchange rate volatility and remittances has been investigated and empirically analyzed by the use of Moving Average Standard Deviation (MASD) of monthly real exchange rate and panel data method within the framework of three stage least square (3SLS) of simultaneous equations system in the Islamic developing countries (D8) over the period 2005-2016. The results demonstrate that there is a mutual relationship between the real exchange rate volatility and remittances. In the meanwhile, the exchange rate volatility has a greater and significant effect on remittances; while their reverse effect is small. In other words, the remittances inflows don’t have a significant effect on the real exchange rate volatility, which leads to economic stability. In addition, foreign direct investment, government expenditures, terms of trade and trade openness cause volatilities in real exchange rates, and on the other side, GDP per capita, financial development, household expenditure per capita, age dependency and differential interest rate are the influential factors of remittances inflow in the studied countries.