Exchange-rate pass-through and the currency of denomination of workers’ remittances

Abstract

We introduce and adopt the concept of exchange-rate pass-through (ERPT) to the flow of remittances to discern whether remittance flows appear to be defined in home or host currencies. We use Poisson estimation on the German socio-economic longitudinal panel for migrants living in Germany concerning eight remittance corridors. We find that ERPT is complete for Germany-based migrants originating in Romania, Kazakhstan, and the former Yugoslavia. In these corridors, flows of remittances appear to be denominated in the host currency. Exchange-rate movements do not elicit changes in euro amounts remitted, implying that recipients may benefit from the entire exchange rate gain due to any euro appreciation. At the other extreme, we find that immigrants in Germany, originating in Greece or Russia, appear to be defining remittances in home currency. There is no pass-through of the exchange rate to remittances. A change in the exchange rate is fully compensated for by an equivalent change in euro remitted, keeping home currency receipts even. Between the two extremes of complete and no pass-through lies Türkiye with incomplete or partial ERPT. In the aggregate, remitters retain some of the exchange-rate gain when the euro appreciates (remitting fewer euros) while recipients still absorb some of the exchange rate change (receiving more local currency). In this case, remittances seem to be denominated partially in euros and partially in the home currency. Inconclusive results are found for remittances flowing to Italy and Poland. Understanding the sensitivity of remittance flows to exchange rate movements has potentially important implications for countries reliant on remittances.