Authors: Wai Ching Poon and Thanh Le
Year: 2021, Volume 21 Number 1
Pages: 139 – 155
This article investigates the effect of net oil trading position on remittance flows through income variation of 55 developing countries over 1986–2018. To disentangle the causal effect of aggregate income on remittances, we take advantage of the persistent response of income to world oil price shocks and instrument income by the lagged interaction term between the dynamics of oil prices and net oil trade volumes. Results reveal that countries with a more substantial net oil trade balance attract larger remittances after an increase in global oil prices. Remittance flows to developing countries are associated with an altruistic or compensatory motive except for net oil-exporting countries where an investment motive prevails. The causal effect reveals via the income channel of the remittance-receiving country. Our results underscore that a surge in the oil trade balance affects remittance flows through its effect on per capita income. Oil trade balance variation exerts a persistent effect on income, and remittances actively respond to permanent income shocks, lasting for more than five years for oil-exporting countries.
Keywords: Remittances, permanent income shocks, oil prices, oil trade balance, economic growth