Harnessing international remittances for financial development: The role of monetary policy

Haruna, Issahaku (2019): Harnessing international remittances for financial development: The role of monetary policy. Published in: Ghana Journal of Development Studies , Vol. 16, No. 2 (30 July 2019): pp. 113-137.

Abstract

This study investigates how remittances and monetary policy independently and interactively shape the financial system of developing countries. It employs single equation instrumental variable based estimation procedures to test the hypothesis that, to boost financial development, remittances require a complementary domestic monetary policy framework which ensures price stability while limiting price distortions. The results show that remittances stimulate financial development only in countries with a favourable monetary environment. Building on these results and employing various indicators of financial development, the results suggest that remittances rise to cushion migrant households from the repercussions of poor financial intermediation, weak institutions and unfavourable business environment in the home country. By extension, the findings are germane to monetary and financial policy in developing countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: Remittances, Monetary Policy, Financial Development, Developing Country, Financial Development Index
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; F - International Economics > F3 - International Finance; G - Financial Economics > G2 - Financial Institutions and Services

References

Abdih, Y., Chami, R., Dagher, J. and Montiel, P. (2012). Remittances and institutions:are remittances a curse? World Development, 40(4), pp. 657-666.

Acosta, P.A., Lartey, E.K.K. and Mandelman, F.S. (2009). Remittances and the Dutch disease. Journal of International Economics, 79(1), pp.102-116.

Aggarwal, R., Demirgüç-Kunt A., and Pería, M.S.M. (2011). Do remittances promotefinancial development? Journal of Development Economics, 96(2), pp. 255-264.

Amidu, M. and Wolfe, S. (2013). The effect of banking market structure on the lending channel: evidence from emerging markets. Review of Financial Economics, pp. 22(4), 146-157.

Baltagi, B.H., Demetriades, P.O. and Law, S.H. (2009). Financial development and openness: Evidence from panel data. Journal of Development Economics, 89(2), pp. 285-296.

Bańbura, M., Giannone, D. and Reichlin, L. (2010). Large Bayesian vector autoregressions. Journal of Applied Econometrics, 25(1), pp. 71-92.

Bernanke, B., and Gertler, M. (1989). Agency costs, net worth, and business fluctuations. The American Economic Review, 79(1), pp. 14-31.

Bernanke, B.S., Gertler, M. and Gilchrist, S. (1996). The flight to quality and the financial accelerator. Review of Economics and Statistics, 78(1), pp. 1-15.

Bernanke, B.S. and Kuttner, K.N. (2005). What explains the stock market’s reaction to Federal Reserve policy? The Journal of Finance, 60(3), pp. 1221-1257.

Billmeier, A. and Massa, I. (2009). What drives stock market development in emerging markets—institutions, remittances, or natural resources? Emerging Markets Review, 10(1), pp. 23-35.

Brown, R.P.C., Carmignani, F. and Fayad, G. (2013). Migrants’ remittances and financial development: Macro – and micro-level evidence of a perverse relationship. The World Economy, 36(5), pp. 636-660.

Cadet, R.L. (2009). A theory of linkage between monetary policy and banking failure in developing countries. Journal of Financial Economic Policy, 1(2), pp. 143-154.

Chowdhury, M.B. (2011). Remittances flow and financial development in Bangladesh. Economic Modelling, 28(6), pp. 2600-2608.

Cihak, M., Demirgüç-Kunt, A., Feyen, E. and Levine, R. (2012). Benchmarking financial systems around the world. Policy Research Working Paper (6175), World Bank.

Cooray, A. (2012). Migrant remittances, financial sector development and the government ownership of banks: Evidence from a group of non-OECD economies. Journal of International Financial Markets, Institutions and Money, 22(4), pp. 936-957.

De Graeve, F., Kick, T. and Koetter, M. (2008). Monetary policy and financial (in) stability: An integrated micro–macro approach. Journal of Financial Stability, 4(3), pp. 205-231.

Davidson, R. and MacKinnon, J.G. (1993). Estimation and inference in econometrics. New York: Oxford University Press.

Demirgüç-Kunt, A., Córdova, E.L., Pería, M.S.M. and Woodruff, C. (2011). Remittances and banking sector breadth and depth: Evidence from Mexico. Journal of Development Economics, 95(2), pp. 229-241.

El-Sakka, M.I., and McNabb, R. (1999). The macroeconomic determinants of emigrant remittances. World Development, 27(8), pp. 1493-1502.

Elbourne, A. and de Haan, J. (2006). Financial structure and monetary policy transmission in transition countries. Journal of Comparative Economics, 34(1), pp. 1-23.

Ezeoha, A.E. (2013). Financial Determinants of international remittance flows to the sub-Saharan African region. International Migration, 51, pp. e84-e97.

Greene, W.H. (2003). Econometric Analysis (5th ed.). New Jersey: Prentice Hall.

Ginebri, S., Petrioli, G. and Sabani, L. (2001). Financial deepening, trade openness and growth: A multivariate cointegrated analysis of the complementary effects. Università di Roma La Sapienza.

Giuliano, P. and Ruiz-Arranz, M. (2009). Remittances, financial development, and growth. Journal of Development Economics, 90(1), pp. 144-152.

Gupta, S., Pattillo, C.A. and Wagh, S. (2009). Effect of remittances on poverty and financial development in sub-Saharan Africa. World Development, 37(1), pp. 104-115.

Hsueh, S.-J., Hu, Y.-H. and Tu, C.-H. (2013). Economic growth and financial development in Asian countries: A bootstrap panel Granger causality analysis. Economic Modelling, 32, pp. 294-301.

Issahaku, H., Abor, J.Y. and Harvey, S.K. (2017). Remittances, banks and stock markets: Panel evidence from developing countries. Research in International Business and Finance, 42(Supplement C), pp. 1413-1427.

Jedidia, K.B., Boujelbène, T. and Helali, K. (2014). Financial development and economic growth: New evidence from Tunisia. Journal of Policy Modeling, 36(5), pp. 883-898.

Komal, R. and Abbas, F. (2015). Linking financial development, economic growth and energy consumption in Pakistan. Renewable and Sustainable Energy Reviews, 44, pp. 211-220.

Krause, S. and Rioja, F. (2006). Financial development and monetary policy efficiency. Department of Economics, Geargia State University.

Sobiech, I. (2019). Remittances, finance and growth: does financial development foster the impact of remittances on economic growth? World Development, 113, pp. 44-59.

Lee, C.-I. (2007). Does provision of public rental housing crowd out private housing investment? A panel VAR approach. Journal of Housing Economics, 16(1), pp. 1-20.

Levine, R. (2005). Finance and growth: Theory and evidence. Handbook of economic growth, 1, pp. 865-934.

Li, Y.D., İşcan, T.B. and Xu, K. (2010). The impact of monetary policy shocks on stock prices: Evidence from Canada and the United States. Journal of International Money and Finance, 29(5), pp. 876-896.

Mandelman, F.S. (2013). Monetary and exchange rate policy under remittance fluctuations. Journal of Development Economics, 102, pp. 128-147.

Minea, A. and Tapsoba, R. (2014). Does inflation targeting improve fiscal discipline? Journal of International Money and Finance, 40, pp. 185-203.

Rajan, R.G. and Zingales, L. (2003). The great reversals: the politics of financial development in the twentieth century. Journal of Financial Economics, 69(1), pp. 5-50.

Singer, D.A. (2010). Migrant remittances and exchange rate regimes in the developing world. American Political Science Review, 104(02), pp. 307-323.

Stratan, A. and Chistruga, M. (2012). Economic consequences of remittances. Case of Moldova. Procedia Economics and Finance, 3, pp. 1191-1195.

Termos, A., Naufal, G. and Genc, I. (2013). Remittance outflows and inflation: The case of the GCC countries. Economics Letters, 120(1), pp. 45-47.

Vacaflores, D.E. (2012). Remittances, monetary policy, and partial sterilization. Southern Economic Journal, 79(2), pp. 367-387.

World Economic Forum (WEF). (2013). The Financial Development Report 2012. Geneva, Switzerland: The World Economic Forum.