BANKS, REMITTANCES AND FINANCIAL DEEPENING IN RECEIVING COUNTRIES. A MODEL

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1 13BANKS, REMITTANCES AND FINANCIAL DEEPENING IN RECEIVING COUNTRIES. A MODEL 2006 Enrique Alberola and Rodrigo Csar Salvado Documentos de Trabajo N

2 13BANKS, REMITTANCES AND FINANCIAL DEEPENING IN RECEIVING COUNTRIES. A MODEL

3 13BANKS, REMITTANCES AND FINANCIAL DEEPENING IN RECEIVING COUNTRIES. A MODEL (*) Enrique Alberola (**) BANCO DE ESPA05A Rodrigo Csar Salvado (***) BANCO CENTROAMERICANO DE INTEGRACI07N ECON07MICA (*) The authors acknowledge the comments by Enrique Kawamura, Josep Vilarrubia and other participants at the IADB's Latin Finance Network meeting at Cepal, Santiago de Chile and Banco de Espa09a. (**) Banco de Espa09a. alberola@bde.es. (**) Banco Centroamericano de Integracin Econmica. salvador@bcie.org. Documentos de Trabajo. N

4 13The Working Paper Series seeks to disseminate original research in economics and finance. All papers have been anonymously refereed. By publishing these papers, the Banco de Espa09a aims to contribute to economic analysis and, in particular, to knowledge of the Spanish economy and its international environment. The opinions and analyses in the Working Paper Series are the responsibility of the authors and, therefore, do not necessarily coincide with those of the Banco de Espa09a or the Eurosystem. The Banco de Espa09a disseminates its main reports and most of its publications via the INTERNET at the following website: Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. 08 BANCO DE ESPA05A, Madrid, 2006 ISSN: (print) ISSN: (on line) Depsito legal: M Imprenta del Banco de Espa09a

5 13Abstract A remarkable fact of the mushrooming remittances market is the absence of commercial banks as relevant players. Furthermore, remittances have been identified as a potential catalyst for the financial deepening of receiving countries through higher access to banking services by migrants' families. Building upon these features, this paper sets up a two-period financial model of remittances without uncertainty. The formulation acknowledges, on the one hand, the altruism component of remittances sent by migrants to their families and, on the other hand, the dominant position of Money Transfer Operators (MTO's) due to migrants' mistrust to banks, which hinders the access of banks to the market. Altruism compounded with a non-competitive market allows MTO's to set excessively high remittance fees and to attain monopolistic rents. The model shows that banks can challenge this position thanks to their role as providers of remunerated saving and credit, which enables them to overcome the competitive disadvantage derived by migrants' mistrust. Notwithstanding this, the main positive impact of banks' entry is attained through higher competition, not through the provision of financial services. All in all, the entry of banks reduces the fees and increases the level of remittances, allows an optimal consumption smoothing and improves the welfare of migrants and their families, although it also increases the volatility of remittances. KEYWORDS: banks, financial development, migrations, remittances. JEL Classification: G20, J61.

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41 13more than the later. However, given the additional impact of the development of the financial system that the banking channel is expected to engineer in the receiving countries, both countries should be interested in developing this channel. References [1] Adams, R. H. Jr., and J. Page (2003), International Migration, Remittances and Poverty in Developing Countries, Poverty Reduction Group, MSN MC4-415, World Bank. [2] Bernheim, D. B., A. Shleifer and L. H. Summers (1986), "The Strategic Bequest Motive", Journal of Labor Economics, Vol. 4, No. 3, Part 2: "The Family and the Distribution of Economic Rewards", S151-S182. [3] Buch, C. M., and A. Kuckulenz (2003), Worker Remittances and Capital Flows to Developing Countries, Centre for European Economic Research. [4] Chami, R., C. Fullenkamp and S. Jahjah (2005), "Are Immigrant Remittance Flows a Source of Capital for Development?", IMF Sta Papers, Vol. 52, No. 1. [5] Hoddinot, J. (1994), A Model of Migration and Remittances Applied to Western Kenia, Oxford Economic Papers, New Series, Vol. 46, No. 3, pp [6] Lasdon, L. S., A. D. Waren, A. Jain and M. Ratner (1978), "Design and Testing of a Generalized Reduced Gradient Code for Nonlinear Programming", ACM Transactions on Mathematical Software, 4, pp BANCO DE ESPA05A 44 DOCUMENTO DE TRABAJO N

42 13[7] Lozano A. F. (2004), Current trends in migrants remittances in Latin America and the Caribbean: An evaluation of their social and economic importance, Latin American Economic System. [8] Nordblom, K. (1998), "Precautionary Savings and Altruism", Journal of Economic Literature, D64, D81, J12. [9] Mckinnon, R. I. (1973), Money and Capital in Economic Development, Washington: Brookings Institution. [10] Orozco, M. (2003), Changes in the Atmosphere? Increase of Remittances, Price Decline and New Challenges, Inter American Dialogue. [11] (2004), The Remittance Marketplace: Prices, Policy and Financial Institutions, The Pew Hispanic Center. [12] Rapoport, H., and F. Docquier (2003), "The Economics of Migrants Remittances", chapter included in the Handbook on the Economics of Reciprocity, Giving and Altruism, L.-A. Gerard-Varet, S.-C. Kolm and J. Mercier- Ythier (eds.). [13] Repetto, A. (2001), Incentivos al ahorro personal, Lecciones de la Economa del Comportamiento, CEA, Universidad de Chile Working Paper. [14] Solimano, A. (2003), Remittances by Inmigrants: Issues and Evidence, World Institute for Development Economic Research. [15] Suro, R., S. Bendixen, L. Lindsay and D. Benavides (2003), Latino, Immigrants, Remittances and Banking, Billions in Motion, produced in cooperation between The Pew Hispanic Center and The Multilateral Investment Fund. 37 BANCO DE ESPA05A 45 DOCUMENTO DE TRABAJO N

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46 13BANCO DE ESPA05A PUBLICATIONS WORKING PAPERS LUIS J. 09LVAREZ, PABLO BURRIEL AND IGNACIO HERNANDO: Price setting behaviour in Spain: evidence from micro PPI data EMMANUEL DHYNE, LUIS J. 09LVAREZ, HERV07 LE BIHAN, GIOVANNI VERONESE, DANIEL DIAS, JOHANNES HOFFMANN, NICOLE JONKER, PATRICK L05NNEMANN, FABIO RUMLER AND JOUKO VILMUNEN: Price setting in the euro area: some stylized facts from individual consumer price data TERESA SASTRE AND JOS07 LUIS FERN09NDEZ-S09NCHEZ: Un modelo emprico de las decisiones de gasto de las familias espa09olas ALFREDO MART01N-OLIVER, VICENTE SALAS-FUM09S AND JES03S SAURINA: A test of the law of one price in retail banking GABRIEL JIM07NEZ AND JES03S SAURINA: Credit cycles, credit risk, and prudential regulation BEATRIZ DE-BLAS-P07REZ: Exchange rate dynamics in economies with portfolio rigidities SCAR J. ARCE: Reflections on fiscalist divergent price-paths M.09 DE LOS LLANOS MATEA AND MIGUEL P07REZ: Differences in changes in fresh food prices by type of establishment. (The Spanish original of this publication has the same number.) 0535 JOS07 MANUEL MARQU07S, FERNANDO NIETO AND ANA DEL R01O: Una aproximacin a los determinantes de la financiacin de las sociedades no financieras en Espa09a S. FABIANI, M. DRUANT, I. HERNANDO, C. KWAPIL, B. LANDAU, C. LOUPIAS, F. MARTINS, T. MATH02, R. SABBATINI, H. STAHL AND A. STOKMAN: The pricing behaviour of firms in the euro area: new survey evidence LUIS J. 09LVAREZ AND I. HERNANDO: The price setting behaviour of Spanish firms: evidence from survey data JOS07 MANUEL CAMPA, LINDA S. GOLDBERG AND JOS07 M. GONZ09LEZ-M01NGUEZ: Exchange-rate pass-through to import prices in the euro area RAQUEL LAGO-GONZ09LEZ AND VICENTE SALAS-FUM09S: Market power and bank interest rate adjustments FERNANDO RESTOY AND ROSA RODR01GUEZ: Can fundamentals explain cross-country correlations of asset returns? 0541 FRANCISCO ALONSO AND ROBERTO BLANCO: Is the volatility of the EONIA transmitted to longer-term euro money market interest rates? 0542 LUIS J. 09LVAREZ, EMMANUEL DHYNE, MARCO M. HOEBERICHTS, CLAUDIA KWAPIL, HERV07 LE BIHAN, PATRICK L05NNEMANN, FERNANDO MARTINS, ROBERTO SABBATINI, HARALD STAHL, PHILIP VERMEULEN AND JOUKO VILMUNEN: Sticky prices in the euro area: a summary of new micro evidence ARTURO GALINDO, ALEJANDRO IZQUIERDO AND JOS07 MANUEL MONTERO: Real exchange rates, dollarization and industrial employment in Latin America JUAN A. ROJAS AND CARLOS URRUTIA: Social security reform with uninsurable income risk and endogenous borrowing constraints CRISTINA BARCEL07: Housing tenure and labour mobility: a comparison across European countries FRANCISCO DE CASTRO AND PABLO HERN09NDEZ DE COS: The economic effects of exogenous fiscal shocks in Spain: a SVAR approach RICARDO GIMENO AND CARMEN MART01NEZ-CARRASCAL: The interaction between house prices and loans for house purchase. The Spanish case JAVIER DELGADO, VICENTE SALAS AND JES03S SAURINA: The joint size and ownership specialization in banks lending SCAR J. ARCE: Speculative hyperinflations: When can we rule them out? 0608 PALOMA L07PEZ-GARC01A AND SERGIO PUENTE: Business demography in Spain: determinants of firm survival JUAN AYUSO AND FERNANDO RESTOY: House prices and rents in Spain: Does the discount factor matter? SCAR J. ARCE AND J. DAVID L07PEZ-SALIDO: House prices, rents, and interest rates under collateral constraints ENRIQUE ALBEROLA AND JOS07 MANUEL MONTERO: Debt sustainability and procyclical fiscal policies in Latin America. 1. Previously published Working Papers are listed in the Banco de Espa09a publications calalogue.

47 GABRIEL JIM07NEZ, VICENTE SALAS AND JES03S SAURINA: Credit market competition, collateral and firms finance NGEL GAVIL09N: Wage inequality, segregation by skill and the price of capital in an assignment model DANIEL P07REZ, VICENTE SALAS AND JES03S SAURINA: Earnings and capital management in alternative loan loss provision regulatory regimes MARIO IZQUIERDO AND AITOR LACUESTA: Wage inequality in Spain: Recent developments K. C. FUNG, ALICIA GARC01A-HERRERO, HITOMI IIZAKA AND ALAN SUI: Hard or soft? Institutional reforms and infraestructure spending as determinants of foreign direct investment in China. 06 JAVIER D01AZ-CASSOU, ALICIA GARC01A-HERRERO AND LUIS MOLINA: What kind of capital flows does the IMF catalyze and when? 0618 SERGIO PUENTE: Dynamic stability in repeated games FEDERICO RAVENNA: Vector autoregressions and reduced form representations of DSGE models AITOR LACUESTA: Emigration and human capital: Who leaves, who comes back and what difference does it make? 0621 ENRIQUE ALBEROLA AND RODRIGO C07SAR SALVADO: Banks, remittances and financial deepening in receiving countries. A model. Unidad de Publicaciones Alcal, 522; Madrid Telephone Fax Publicaciones@bde.es

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