Analysis of the Propagation Effects of Remittances on the Vulnerability of External Trade of the Republic of Moldova

Abstract

In the Republic of Moldova remittances have become a much-discussed subject, the country ranking among the economies with the highest share of remittances in terms of GDP. What is more, remittances, unlike FDI, external trade and other sources of income, seem to have a significant impact on economic growth. Republic of Moldova is a small open economy vulnerable to external shocks. We will examine the effect of remittances on the balance of trade by creating an econometric model. Am attempt has also been made to capture the positive and negative spillovers that migrants’ remittances have on a country’s socio-economic development. Within the research a variety of analytical tools are employed including Granger causality tests, unit root tests, coupled with a structural vector auto regression (SVAR), impulse response function (IRF) analyses and variance decomposition. We find that net trade and remittances are closely associated and follow an almost identical path. Remittances have strong effect on the growth of negative net trade of the Republic of Moldova.