Remittances and economic growth nexus: Do financial development and investment act as transmission channels? An ARDL bounds approach

Najibullah, Syed and Masih, Mansur (2015): Remittances and economic growth nexus: Do financial development and investment act as transmission channels? An ARDL bounds approach.

Abstract

The study seeks to investigate the causal links between economic growth and remittances through two specific transmission channels, namely financial development and investment. Using Bangladesh as a case study, the study employs autoregressive distributed lag (ARDL) approach to cointegration proposed by Pesaran et al. (2001). Based on a time series data over the period 1977–2013, the findings reveal no long term lead-lag relationship between economic growth and remittances. However, the short term relation exists between remittances and investment. Investment also stimulates economic growth. A unidirectional transmitting channel through investment can be identified in the short run. The financial development was found to be weak in the growth remittances nexus and this shows the presence of a missing link between investment and financial development. This might happen due to financial exclusion and inflow of remittances through informal unaccounted channel. Policy makers should focus on financial sector deepening to promote financial inclusion. Moreover, creating awareness to promote flow of remittances through formal channel should get priority. For the future researchers, the inclusion of microfinance sector as a transmission channel might provide significant findings as the remittances in fact represent the people at the bottom of the pyramid, where microfinance sector has a strong presence unlike the formal financial sector.

• Item Type: MPRA Paper
• Language: English
• Keywords: remittances, economic growth, ARDL
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

References

Aggarwal, R., Demirguc-Kunt, A., & Martinez-Peria, M. (2006). Do workers’ remittances promote financial development? In World bank policy research working paper no. 3957.

Ahmed, H. A., & Salah Uddin, Md. G. (2009). Exports, imports, remittances and growth in Bangladesh: An empirical analysis. Trade and Development Review, 2, 79–92.

Amuedo, D. C., & Pozo, S. (2004). Workers’ remittances and the real exchange rate: A paradox of gifts. World Development, 32, 1407–1417.

Ang, J. B. (2007). Are saving and investment cointegrated? The case of Malaysia (1965–2003). Applied Economics, 39, 2167–2174.

Carrion-i-Silvestre, J. L., Kim, D., & Perron, P. (2009). GLS-based unit root tests with multiple structural breaks both under the null and the alternative hypotheses. Econometric Theory, 25, 1754–1792.

Chami, R., Fullenkamp, C., & Jahjah, S. (2005). Are immigrant remittance flows a source of capital for development? International Monetary Fund Staff Papers. Palgrave Macmillan Journals, 52, 55–81.

Clarke, J. A., & Ralhan, M. (2005). Direct and indirect causality between exports and economic output for Bangladesh and Sri Lanka: Horizon matters. In Econometrics working paper series EWP05012. University of Victoria (ISSN 1484-6441).

Eckstein, S. (2004). Dollarization and its discontents: Remittances and the remaking of Cuba in the post-Soviet era. Comparative Politics, 36, 313–330.

Giuliano, P., & Ruiz-Arranz, M. (2009). Remittances, financial development, and growth. Journal of Development Economics, 90, 144–152.

Jouini, J. (2015). Economic growth and remittances in Tunisia: Bi-directional causal links. Journal of Policy Modeling, 37(2), 355-373.

Kwiatkowski, D., Phillips, P. C. B., Schmidt, P., & Shin, Y. (1992). Testing the hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? Journal of Econometrics, 54, 159–178.

Le, T. (2009). Trade, remittances, institutions, and economic growth. International Economic Journal, 23, 391–408.

Loizides, J., & Vamvoukas, G. (2005). Government expenditure and economic growth: Evidence from trivariate causality testing. Journal of Applied Economics, 8, 125–152.

Love, J., & Chandra, R. (2005). Testing export-led growth in Bangladesh in a multivariate VAR framework. Journal of Asian Economics, 15, 1155–1168.

Lucas, R. E. B. (2005). International migration and economic development: Lessons from low-income countries. Chel-tenham, UK and Northampton, MA, USA: Edward Elgar.

Lutkepohl, H. (1982). Non-causality due to omitted variables. Journal of Econometrics, 19, 367–378.

Mamun, K. A. Al., & Nath, H. K. (2005). Export-led growth in Bangladesh: A time series analysis. Applied Economics Letters, 12, 361–364.

Narayan, P. K. (2005). The saving and investment nexus for China, evidence from cointegration tests. Applied Economics, 37, 1979–1990.

Pesaran, M., Shin, Y., & Smith, R. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, 289–326.

Pradhan, G., Upadhyay, M., & Upadhyaya, K. P. (2008). Remittances and economic growth in developing countries. The European Journal of Development Research, 20, 497–506.

Said, E. S., & Dickey, D. A. (1984). Testing for unit roots in Autoregressive Moving Average models of unknown order. Biometrika, 71, 599–607.

Shirazi, N. S., & Abdul Manap, T. A. (2005). Export-led growth hypothesis: Further econometric evidence from South Asia. The Developing Economies, 4, 472–488.

Siddique, M. A., Selvanathan, E. A., & Selvanathan, S. (2010). Remittances and economic growth: Empirical evidence from Bangladesh, India and Sri Lanka. In Discussion paper 10.27. University of Western Australia.

Spatafora, N. (2005). Two current issues facing developing countries. Washington, DC: World Economic Outlook, IMF.

Tang, T. (2003). Japanese aggregate import demand function: Reassessment from the bounds testing approach. Japan and the World Economy, 15, 419–436.

Taylor, J. E. (1992). Remittances and inequality reconsidered: Direct, indirect and inter-temporal effects. Journal of Policy Modelling, 14, 187–208.

Taylor, J. E. (1999). The new economics of labour migration and the role of remittances in the migration process.International Migration, 37, 63–88.