The Impact of Remittances on Key Macroeconomic Variables: The Case of Palestine

Remittance inflows to Palestine are an imperative source of foreign exchange. In 2013, remittance inflows amounted to US $2.3 billion, making Palestine the seventh-largest recipient of remittances relative to GDP. The share of personal remittances in GDP during the period 1995-2013 ranges from 16% to 34%, placing Palestine among the top remittances/GDP recipient countries in the world (second to Tajikistan). On average, personal foreign transfers are twice as large as exports and comparable to official aid including transfers to non-governmental organizations. Foreign direct investment is a small fraction of remittance inflows, with remittances reaching 10 to 15 times FDI. Despite the sheer size of remittance inflows to the Palestinian economy, to our knowledge, the impact of remittances on both the micro- and macroeconomic variables has never been investigated. This study partially fills this gap by addressing the impact of remittance inflows on key macroeconomic variables: private consumption, gross domestic investment (investment), imports, and more importantly output growth.

 The purpose of this paper is twofold. First, we analyze the evolution of personal remittance inflows to the Palestinian economy during the period 1995-2013. Our analysis focuses on the sources of remittances, sizes of remittances over the last 20 years in terms of both nominal and real values, sources of fluctuations in remittances, comparison between remittance inflows and other traditional sources of capital inflows to the Palestinian economy, and comparison between remittance inflows to the Palestinian economy and other economies in terms of nominal values and the share of remittances in the GDP. Furthermore, we decompose remittance inflows into remittances of workers' compensation (especially from Israel) and emigrant remittances and analyze the evolution of each one separately. In so doing, the variation in personal remittances is decomposed into the variations of workers' compensation and emigrant remittances, enhancing our comprehension of the high variance of remittance inflows. Remittances of workers’ compensation, especially from Israel, are mainly affected by the political environment, while emigrant remittances follow a more complicated pattern, partially unveiling Palestinian emigrants' motivations of remitting. Finally, we analyze the cyclical component of remittances and their co movement with the cyclical component of GDP using the Hodrick-Prescott filter.

Second, we investigate the impact of personal remittance inflow on the Palestinian economy in both the short and the long run. Specifically, we are mainly interested in the dynamic effects of remittances on key macroeconomic variables in both the short and the long run, including aggregate private consumption, investment, imports, and GDP. Differently put, this study examines the use of remittances in the Palestinian economy on the aggregate level and how remittances are distributed across national income components. The ultimate goal of this study is to provide an answer to the question of whether past and current remittance inflows to the Palestinian economy contribute to current and future economic growth.