Econometric estimation of the determinants and impact of remittances on the Macedonian economy

Abstract

Although Macedonia is among the top emigration countries in the world, and in spite of the fact that private transfers from abroad have covered more than 50% of the trade deficit in the last ten years, relatively little is known about the determinants of the remittances and their impact on the macroeconomic stability of the Macedonian economy. The purpose of our paper is to offer an econometric estimation of the determinants of remittances to Macedonia and to investigate whether remittances sent to Macedonia have a stabilizing or destabilizing effect on the Macedonian economy, especially in time of financial shocks. To achieve this objective, we estimate a vector autoregressive (VAR) model using the available monthly data on migrant workers’ remittances as a dependent variable and industrial output, gross wages, unemployment rate, consumer price indices, trade deficit, total imports and loans to private sector as independent variables in a long period (January 2005 - December 2012). We find evidence that remittances sent to Macedonia have a procyclical character meaning that they act as a boost to economic activity in times of economic upturns, and as a destabilizing factor to the Macedonian economy in times of economic downturns.