Do immigrants’ funds affect the exchange rate?

• Published date: 01 February 2021
• DOI: http://doi.org/10.1111/twec.13003
• Date: 01 February 2021
• Author: Nusrate Aziz,Wing Leong Teo,Arusha Cooray

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wileyonlinelibrary.com/journal/twec World Econ. 2021;44:560–585.

© 2020 John Wiley & Sons Ltd

Received: 1 September 2019

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Revised: 8 June 2020

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Accepted: 15 June 2020

DOI: 10.1111/twec.13003

ORIGINAL ARTICLE

Do immigrants’ funds affect the exchange rate?

NusrateAziz1,2,3

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ArushaCooray4,5

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Wing LeongTeo6

1School of Business and Economics, Algoma University, Sault Ste. Marie, ON, Canada

2Global Labor Organization (GLO)

3International Migration Research Centre, Waterloo, ON, Canada

4UNU-WIDER, Helsinki, Finland

5Centre for Poverty Analysis, Colombo, Sri Lanka

6School of Economics, University of Nottingham Malaysia, Semenyih, Selangor, Malaysia

KEYWORDS

Canada, exchange rate, immigrants’ money

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INTRODUCTION

Canada has a history of being a net immigration country, accepting more migrants per capita than the

United States, the United Kingdom and Europe. Currently, migrants represent more than 20 per cent

of the total population of Canada (Canadian National Household Survey, 2011). This trend is likely

to continue into the future given the integration of immigration policy into economic policy, through

the emphasis placed on immigration to meet Canada's labour market requirements (Challinor, 2011).

Canadian immigration policy places priority on economic migrants, that is skilled workers and busi-

ness immigrants with entrepreneurial skills and financial capital. Canada accepts approximately 6,000

business applicants annually granting permanent residence to 15,000 immigrants. While there is a

large literature on migration and remittances, the migration–remittance debate has focused primarily

on how migration and remittances sent back home by migrants affects both home and host countries.

Similarly, the emphasis of the literature on capital flows and exchange rates has been on the influence

of foreign direct investment (FDI) and portfolio flows on exchange rates. An area that has hereto been

overlooked in the literature is how the money brought into host countries by immigrants affects the

receiving nation. While the Canadian authorities have specified the minimum amounts of money that

people are required to bring with them, migrants bring in much more than this minimum requirement

(Ley, 2011).

Therefore, using data on the funds brought in by migrants, we proceed to investigate how immi-

grants’ money affects the exchange rate of Canada. According to the Canadian citizenship laws, an

individual migrating under the economic class is required to bring with them at least CAD 12,300 in

2017 which increases with the number of family members (Immigration, Refugees, & Citizenship

Canada, 2017). Business migrants are required to bring in much more. Under the Federal Investor

programme, migrants are required to bring in CAD 400,000 which is deposited with the Receiver

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General of Canada and have a personal net worth of CAD 800,000 with two years of management

or business experience. Under the entrepreneur class, permanent residence is granted to those with

business experience and a personal net worth of CAD 300,000 upon setting up in Canada within two

years of arrival (Quest Canada, 2015).

Studies indicate that these migrants bring in significant amounts of money. In an in-depth study

employing a number of databases and through the use of interviews which trace migrant families back

25years, Ley (2011) makes the observation that: “..the Canadian Imperial Bank of Commerce estimated

the inward flow from Hong Kong to Canada to be between CAD 2 billion to CAD 4 billion a year in the

early 1990s” (Symonds, Yang, & Zuckerman, 2011 cited in Ley, 2011). Large sums of money were sim-

ilarly transferred from Taiwan with the relaxation of exchange controls which amounted to around 40%

of Canada's GDP (Bradbury 1989 cited in Ley, 2011). Ley (2011) further goes on to state that in the early

1990s, a senior banker in Vancouver had confided in him that: “The banks have so much Asian money

coming in that they don't know what to do with it”. According to Ley (2011), another senior bank official

stated: “…that $US100 million had entered his bank from a Taiwanese branch…”, while a journal noted

that: “Taiwan's top ten moguls have already settled down in Vancouver and started their investment”.

It is well established in the literature that capital flows affect the exchange rate (Calvo, Leiderman,

& Reinhart, 1993; Frankel, 1983; Frankel & Rose, 1994; Mundell, 1963 among others). Hence, this

large inflow of migrant money is most likely to affect the exchange rate of Canada. Despite the fact

that a number of studies investigate the impact of capital flows on the exchange rate (Calvallo &

Ghironi, 2002, Elbadawi & Soto, 1997, Naceur, Bakardzhieva, & Kamar, 2012 among others) and re-

mittances on the exchange rate (Acosta, Lartey, & Mandelman, 2009; Barajas, Chami, Fullenkamp, &

Garg, 2010; Caceres & Saca, 2006), relatively little is known about how the money brought into host

countries by immigrants affects the exchange rate of the host country. A study by Dungan, Fang, and

Gunderson (2012) employs a macroeconometric forecasting model to investigate the macroeconomic

effects on the Canadian economy of a hypothetical increase in immigration. While their simulations

suggest a positive impact of immigration on a number of macroeconomic variables including gross

domestic product (GDP), aggregate demand, investment, productivity, government expenditures,

taxes and net government balances, the result with regard to the exchange rate is mixed. Our study

differs from that of Dungan et al. (2012) in that we use data on funds brought into Canada by migrants

to investigate its effect on the exchange rate of Canada.

An excess of capital inflows can lead to an exchange rate appreciation, which in turn leads to a

loss of a country's competitiveness, adversely affecting exports. Identifying the effect of these cap-

ital inflows is therefore important for taking appropriate policy measures. Employing annual data

over 1966–2014 from the Citizenship and Immigration statistics archives of Canada (CIC), our main

contribution to the literature is to investigate how the money brought in by immigrants affects the

exchange rate of Canada. Time-series data for the minimum amount of funds to be brought in by

immigrants are not available in CIC. We therefore construct a time series for the funds brought in by

immigrants as explained in Section 4. Thus, this is a second contribution of our study. This is the first

study to our knowledge, which constructs a time series and investigates how the money brought into a

host country by immigrants affects the exchange rate.

Results are tested for robustness in a number of ways: additional control variables to capture a

range of possible influences on the exchange rate, different estimation methods including the au-

toregressive distributed lag (ARDL) estimation method of Pesaran and Shin (1999), the dynamic

OLS (DOLS) estimation method of Stock and Watson (1993), two-stage least squares (2SLS) and the

generalised method of moments (GMM). Given the uncertainty and likely measurement errors in the

immigrants’ money variable, the robustness of the results is also tested using the ratio of immigration