Do Remittances Lead to Dutch Disease? Evidence from Kyrgyzstan

Abstract

This study aims to check whether there is a Dutch disease in Kyrgyz Republic due to inflow of remittances. Based on existing literature and observation of characteristics of Kyrgyz economy, it is hypothesized that an inflow of remittances in Kyrgyzstan leads to currency appreciation, decrease in tradable and increase in non-tradable output and consequently leads to realization of Dutch Disease. For that reason, this study using monthly data from 2005 to 2012 for Kyrgyzstan, Vector Error Correction (VEC) and Vector Auto Regression (VAR) models investigates if this hypothesis stands true. The results of the tests rejected the hypothesis that inflow of remittances in Kyrgyzstan lead to the realization of Dutch Disease. The findings suggest that remittances could lead to Dutch disease realization through real exchange rate appreciation but their effect on tradable and non-tradable goods were not observed.