REMITTANCES AND THE DUTCH DISEASE: Case of the Kyrgyz Republic

The Kyrgyz Republic is among high remittances receiving country in the world. Generally, the effects of these financial inflows have been considered as positive to the economy. However, much fewer studies were done on identifying possible adverse effects of these inflows. One of such potential negative effects is known as Dutch Disease, when large financial inflows lead to real exchange rate depreciation. Thus, the economy, where so called Dutch Disease is occurring, loses its competitiveness. The paper attempts to identify the symptoms of the Dutch Disease in Kyrgyz economy. The main methodology approach is Vector Autoregressive model (VAR). This method is chosen, because it allows effectively identify both short-run and long-run effect of remittances to the economy. Additionally, the paper employ the Granger causality test and Impulse response function in the estimations. Initial hypothesis is that remittances do not contribute to real exchange rate appreciation in the short-run but do so in the long-run.