in consumption of nontradables, which reduces nontradable inflation. The findings also indicate that a near-zero nontradable inflation rate, and a managed variability in the nominal exchange rate characterizes the optimal monetary policy, suggesting that an inflation targeting regime is preferable to a fixed exchange regime. An empirical assessment of the theoretical model using vector autoregression analysis indicates that these observations are generally consistent with the dynamics of inflation induced by a shock to remittances in El Salvador, which is representative of an economy that operates a fixed exchange regime, and the Philippines, which typifies an economy with an inflation targeting monetary regime.

It may be argued then, that exchange rate regimes could facilitate or undermine economic growth directly, to the extent that they curtail or precipitate Dutch disease effects of remittances respectively, through their impact on resource reallocation which in turn has implications for economic growth. In addition, exchange rate regimes could have an indirect effect on how remittances impact growth, particularly in the case where remittances act as investment capital. Furthermore, given that exchange rate policies have implications for macroeconomic (un)certainty and the transmission of negative external shocks, the choice of exchange rate regimes could serve to provide desirable macroeconomic environments for remittances to positively affect growth or otherwise.

On that account, this study contributes to the literature by examining the question of whether the relationship between remittances and economic growth is affected by exchange rate policies in recipient countries. The paper also analyzes whether exchange rate flexibility diminishes the growth effects of remittances in countries with low levels of financial development. Furthermore, this study differs from the extant literature, in that it utilizes a comprehensive data set on 135 developing and transition countries representing different income groups, and employs estimation techniques that address potential endogeneity issues that exist between GDP per capita growth on one hand, and exchange rate regimes and remittances on the other hand.

# 2 Related Literature

Remittances to developing countries have been on a rising trend in the last several years, with a projection to top $500 billion by 2015 according to a World Bank report on global migration and remittances issued in 2012. The estimates for the recent past are $327 billion in 2010 and $372 billion in 2011, reaching slightly over $406 billion in 2012. Remittances have become an important component in total international capital flows to developing countries, and currently, are more than three times the size of official development assistance and have become the second largest source of external finance behind foreign direct investment (FDI). Table 1 shows the top recipients of migrant remittances in 2012, with India leading the group and followed closely by China, having received $70 billion and $65 billion respectively.

The literature has documented both desirable and undesirable consequences of remittances in recipient economies. Studies by Adams and Page (2005) and Acosta et al. (2008) have provided some evidence that remittances are associated with lower poverty indicators and high growth rates.

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