Do Remittances Facilitate a Sustainable Current Account?

Abstract We examine how workers' remittances impact on the current account. In doing so, we focus on how remittances affect the sustainability rather than the size of current account balances. We find that the presence of remittances makes it more likely that exports and imports are cointegrated, thereby lending support to current account sustainability. Furthermore, quantile regression analysis suggests that increased remittances are associated with a faster speed of current account adjustment towards long‐run equilibrium, particularly for those countries characterised by already highly persistent current account balances. In contrast to a literature that emphasises an adverse Dutch disease impact of workers' remittances on the real exchange rate in terms of reduced external competitiveness, our findings suggest that remittances are actually beneficial to the current account balance.