The impact of the U.S. Covid-19 response on remittance flows to emerging markets and developing economies

Abstract

Nearly 25 percent of total worldwide remittances each year originate in the United States. During the Covid-19 pandemic, worldwide remittances fell precipitously in the first half of 2020, and then recovered in the second half. Thus, there has been a tremendous amount of resiliency in aggregate remittance flows since the onset of the pandemic, though country-specific experiences have varied. In this paper, we study the response of remittance flows to U.S.-specific shocks during the pandemic, such as changes in U.S. deaths, U.S. unemployment in migrant-intensive industries, U.S. unemployment insurance and personal current transfer receipts. Using both panel vector autoregressive (panel VAR) and global vector autoregressive (global VAR) models, along with monthly data from 2018 to 2021, we find that remittance flows into emerging markets decline sharply in response to U.S. unemployment shocks across industries and to shocks in U.S. deaths. However, flows recover quickly after one to two months. Due to the large immigrant presence and proximity to the United States, the most sizable remittance response is detected in Latin America. The response to U.S. fiscal stimulus is net positive. Combining both models provides insights on the direct effect of U.S. shocks on remittance flows with the panel VAR, as well as the impact within the context of a global system of countries and global factors that may adversely affect all countries in the system with the global VAR, as seen during Covid-19. We contribute to the literature by studying the macroeconomic impact of the U.S. reaction to the pandemic for countries that are large recipients of remittances originating from the United States.