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l
BHUPAL SINGH
FIGURE 8.3 Impulse Response of Workers’ Remittances to Various Shocks in Model 2 a. Oil price shock
b. Interest rate shock
0.20
0.20
0.15
0.15
0.10
0.10
0.05
0.05
0.00
0.00
−0.05
−0.05 2
4
6
8
10 12 14 16 18 20
2
c. Shock to U.S. GDP
4
6
8
10 12 14 16 18 20
d. Shock to remittances
0.20
0.20
0.15
0.15
0.10
0.10
0.05
0.05
0.00
0.00 −0.05
−0.05 2
4
6
8
10 12 14 16 18 20
2
4
6
8
10 12 14 16 18 20
Source: Author.
Estimates from Model 1 show that shocks to remittances explain the largest share of the fluctuations in remittance inflows to India in the short run; their impact, however, fizzles out over the long run (table 8.7). Shocks to real activity in the Middle East emerge as an important driver of fluctuations in remittance inflows to India in the medium to long run. Interest rate differentials between the remittance-sending and -receiving countries also significantly affect the remittance inflows in the medium to long run. The variance decomposition analysis based on Model 2 reiterates the results of impulse responses that shocks to remittances explain mainly short-run behavior of remittances. The medium to long-run behavior is, however, explained by the level of real activity in the host countries. Model 2 captures the impact of real activity in another important source region of remittances, the United States. The aggregate impact of real activity in both the Middle East and the United States emerges as the most dominant factor explaining remittance inflows to India. Interest rate differentials also explain a significant part of fluctuations in remittance inflows to India. This could be attributed to the investment motive of migrants sending remittances. Figure 8.4 reveals that although remittance inflows from overseas migrants to India has witnessed some cyclical slowdown since the third quarter of 2008 because of subdued economic activity in the United States and the Gulf countries, a significant