Introduction
Remittances are the money transferred from abroad by the people who work there to their home countries. Approximately since the time Latvia has entered the European Union it has been a phenomenon of increasing importance. More and more people are leaving the country to earn money in the other members of the EU, which results in growing amounts of money that are flowing in.
The purpose of this report is to analyze the effects of remittances on the Latvian economy. At a first glance increase of the disposable income of Latvians might be treated as a positive effect. However, before the global crisis has started and economy expected recessionary pressure, overheating of the economy was a widely discussed topic. Taking into account that the boom in the Latvian economy has now ended, it is a good standpoint to look back. The author makes a hypothesis that the remittances have a strong negative impact on the Latvian economy under the conditions of overheating.
In order to find the answer to the hypothesis the macroeconomic analysis has been made. Two models will be used: IS-LM and AS-AD relations. The effect on the current account is also reviewed and the role the fixed exchange rate has on the economy in this context.
The paper starts with background information in order to introduce the reader into the topic. Then comes the analysis of the effect of remittances on IS, LM curves, which sum up to aggregate demand. Following that is AS and AD analysis and a brief analysis of the impact of money transferred from abroad on the current account and the effects coming from the exchange rate. Finally the conclusions are delivered.
1. Economic Background
For the past several years Latvia is experiencing emigration of population to other countries. After Latvia has entered the EU, it became relatively easy for its citizens to go to other EU countries, and thousands of people decided to go somewhere in search for better life and opportunities to earn more money. Latvian emigrants are mainly choosing Ireland, the United Kingdom and Sweden as new home-countries. These countries are so popular because of their foreign policy and their prosperity. Moreover, since English is being taught in many schools as the main foreign language, these two countries become the most convenient ones as well. As statistical data shows, this effect has been quite stable for the last several years.
…
