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Monetary And Exchange Rate Policy Under Remittance Fluctuations

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Executive Summary

Using data for the Philippines, the author develops and estimates a heterogeneous agent model to analyze the role of monetary policy in a small open economy subject to sizable remittance fluctuations. The author includes rule-of-thumb households with no access to financial markets and tests whether remittances are countercyclical and serve as an insurance mechanism against macroeconomic shocks. When evaluating the welfare implications of alternative monetary rules, the author considers both an anticipated large secular increase in the trend growth of remittances and random cyclical fluctuations around this trend.

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