Remittance Impact Evaluation
Also known as: Remittance Causal Effect Estimation, Exchange-Rate Shock Remittance Design, Remittance IV Evaluation, Yang Remittance Identification
Remittance impact evaluation is the set of causal-inference designs used to estimate what remittances actually do to the households that receive them — their effect on investment, schooling, child labor, entrepreneurship, and labor supply — rather than merely correlating remittance receipts with outcomes. The central difficulty is endogeneity: households with migrants and remittances differ systematically from those without, both in observable ways and in unobserved drive, networks, and shocks, so a naive comparison confounds the effect of remittances with the selection into sending a migrant. Dean Yang's 2008 study of Philippine households provided the design that defines the field, exploiting the sharp, differently-sized exchange-rate shocks of the 1997 Asian financial crisis: because migrants were working in many different countries, their home-currency remittances rose or fell by different amounts for reasons unrelated to the household, creating exogenous variation in remittance value. Using this shock as an instrument, Yang found that favorable shocks raised household investment, schooling, and entrepreneurship rather than just consumption. The approach interprets such results through the new economics of labor migration, in which remittances relax credit and insurance constraints. It has become the template for credible remittance evaluation.
Key highlights
- Directly confronts the selection and reverse-causation bias that makes naive receiver-versus-non-receiver comparisons uninterpretable.
- The exchange-rate-shock instrument provides variation that is plausibly exogenous to the household and differs in size across families.
- Estimates effects on a range of policy-relevant outcomes — schooling, investment, entrepreneurship, labor supply — rather than consumption alone.
- Connects cleanly to the new economics of labor migration, allowing causal evidence on whether remittances relax credit and insurance constraints.
Intuition
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How it works
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When to use it
Use remittance impact evaluation when you want a credible causal estimate of how remittances affect origin-household outcomes and you have, or can construct, a source of exogenous variation in remittance income together with household-level data on the outcomes. The exchange-rate-shock design is ideal when migrants from a population are spread across multiple destination currencies and you observe their pre-shock distribution, but the broader logic applies to any plausibly exogenous shifter of remittance value, including instrument-style natural experiments or, where feasible, randomized reductions in transfer costs. The approach is most appropriate when selection into migration is a first-order threat and panel or repeated cross-section data are available to trace outcome changes. It is less suitable when no exogenous variation exists and only cross-sectional comparisons of receivers and non-receivers are possible, when the relevant question is the determinants of migration rather than the effect of remittances, or when sample sizes are too small to support instrumental-variables estimation. It complements the new economics of labor migration test, supplying the causal counterpart to that framework's behavioral predictions.
Strengths & limitations
- Directly confronts the selection and reverse-causation bias that makes naive receiver-versus-non-receiver comparisons uninterpretable.
- The exchange-rate-shock instrument provides variation that is plausibly exogenous to the household and differs in size across families.
- Estimates effects on a range of policy-relevant outcomes — schooling, investment, entrepreneurship, labor supply — rather than consumption alone.
- Connects cleanly to the new economics of labor migration, allowing causal evidence on whether remittances relax credit and insurance constraints.
- Valid instruments are scarce; the design requires a credible exogenous shifter of remittance value that many settings lack.
- The exchange-rate-shock approach needs households with migrants spread across multiple currencies and accurate pre-shock destination shares.
- Instrumental-variables estimates identify a local effect for households whose remittances responded to the shock, limiting external validity.
- Exchange-rate shocks may affect origin households through channels other than remittances, threatening the exclusion restriction.
Common pitfalls
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Frequently asked
Why not simply compare households that receive remittances with those that do not?
Because the two groups differ for reasons that also affect the outcomes you care about. Households that send migrants and receive remittances tend to be more enterprising, better networked, and differently exposed to shocks, and remittances themselves often rise precisely when the household suffers a setback. A raw comparison therefore mixes the causal effect of the money with selection into migration and with reverse causation. Yang's design breaks this by using exchange-rate shocks that changed remittance value for reasons external to the household, so the comparison reflects exogenously-induced differences in remittances rather than differences in the kinds of families that receive them.
How do exchange-rate shocks identify the effect of remittances?
Migrants from a single origin work in many different countries, and during a currency crisis those countries' exchange rates move by very different amounts. A household whose migrant happened to be in a country whose currency strengthened against the home currency suddenly received more in local-currency terms, while an otherwise similar household with a migrant elsewhere received less — purely because of where the migrant had gone before the crisis. Interacting each household's pre-crisis distribution of migrants across destinations with destination-specific exchange-rate changes yields a household-specific, plausibly exogenous shock to remittance value, which serves as an instrument for the remittances actually received.
What does a positive effect on investment tell us about migration theory?
If extra remittance income causes households to invest more in schooling, durables, or enterprise rather than only to consume more, it supports the new economics of labor migration view that origin households face missing or imperfect credit and insurance markets. Under that view remittances are not just income transfers but a way to finance investment the household could not otherwise fund, so constraint-relief, not mere generosity, drives the developmental response. Yang's findings of higher schooling and entrepreneurship after favorable shocks are read in exactly this way, which is why remittance impact evaluation is treated as the causal complement to NELM's behavioral predictions about market failure and household strategy.
Sources
- 1.Yang, D. (2008). International Migration, Remittances and Household Investment: Evidence from Philippine Migrants' Exchange Rate Shocks. The Economic Journal, 118(528), 591-630.
- 2.Stark, O., & Taylor, J. E. (1991). Migration Incentives, Migration Types: The Role of Relative Deprivation. The Economic Journal, 101(408), 1163-1178.
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Cite this page
ScholarGate. (2026, June 23). Remittance Impact Evaluation. ScholarGate. https://scholargate.app/migration-studies/remittance-impact-evaluation