This paper examines the dynamic and desirable properties of monetary regimes in a remittances recipient economy, with emphasis on the effect on sectoral output and nontradable inflation dynamics. The findings indicate that under a fixed exchange rate regime, an increase in remittances creates increased demand for nontradable goods, and hence a rise in nontradable inflation, as well as expansion in output of nontradables. Under a nontradable inflation targeting regime, however, a decrease in nontradable inflation and an expansion in tradable goods production are observed following an increase in remittances. A near-zero nontradable inflation rate and managed variability in the nominal exchange rate typify the optimal monetary policy, suggesting that an inflation targeting regime is preferable to a fixed exchange regime under such a scenario. A VAR analysis shows that the dynamics of inflation in El Salvador and the Philippines is in consonance with those observed in the model under the fixed exchange rate and nontradable inflation targeting regimes, respectively.
Exchange rate and inflation dynamics: does the month or quarter of the year matter?
