resilience to external shocks is a key objective of international financial institutions and policymakers. Concessional lending and foreign aid are traditional ways to address vulnerabilities, but their effectiveness is highly disputed. The use of contingent financing instruments has so far been quite limited (International Monetary Fund and World Bank, 2011). Many countries are increasingly relying on international reserves as a stabilization tool, but this imposes high social and economic costs (Rodrik, 2006). Removing barriers to remittances may be a useful complement to such measures.

We analyze how remittances are affected by structural characteristics, macroeconomic conditions, and adverse shocks in both source and recipient economies, using a novel, rich panel dataset on bilateral remittances from 103 Italian provinces to 87 developing countries over the period 20052011. Remittances are negatively correlated with the business cycle in recipient countries, and increase especially strongly in response to adverse exogenous shocks, such as natural disasters or large declines in the terms of trade. In addition, remittances are positively correlated with potential GDP in recipient countries. These results are consistent with remittances being driven by both altruism and investment motives.

Remittances are also positively correlated with economic conditions in the source province. Nevertheless, in the presence of similar negative shocks to both source and recipient economies, remittances remain countercyclical with respect to the recipient country. All these results are robust to potential reverse causality from remittances to macroeconomic conditions in the recipient country.

Financial development in the source province is positively associated with remittances, likely because it reduces transaction costs and eases access to financial services for migrants. Conversely, financial development in the recipient country is negatively associated with remittances, suggesting that remittances help alleviate credit constraints. All these results hold even controlling for unobserved country-province pairs fixed effects, which capture time-invariant institutional and geographical factors which may drive remittance flows.

We conclude that remittances may indeed contribute significantly to macroeconomic stability in recipient countries. This effect should be considered together with their positive impact on poverty alleviation and growth, emphasized in the existing literature. From a policy perspective, our results suggest that one way to increase developing countries’ resilience to exogenous shocks is to increase their reliance on remittances, rather than on more volatile capital inflows. One – direct – way to achieve this goal is to reduce barrier to international migration (Clemens, 2011). A second way is to promote migrants’ access to financial services in host countries. Overall, these findings corroborate the efforts being carried out by international financial institutions and the private sector to reduce the costs of migrant remittances and to foster freer remittance flows.

# **References**

> Adams Jr., R. H. (2009). The determinants of international remittances in developing countries. _World Development_ , **37** (1), 93–103.

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