Macroeconomic impact of remittances in developing economies
2019-04-26T09:57:52Z (GMT) by
This thesis examines the macroeconomic impact of remittances in developing economies, using data from 1990 to 2016. Despite poverty-reducing and welfare-enhancing characteristics for recipient households, remittances remain to inhibit macroeconomic policy in developing economies; by producing Dutch Disease effects, by creating an indeterminate effect on long run economic growth, and by reducing the quality of financial institutions. This thesis explores these key issues surrounding remittances along with a overall theme on fiscal policy, financial development and monetary policy. The significant contributions of my thesis are as follows: it provides insight into the effects of remittance inflows on fiscal cyclicality in developing economies; it provides new understanding into the relationship between remittances, financial development and economic growth; it provides a newly constructed measure of the financial development index across the panel dataset; and it shows the effects of remittance inflows on monetary policy by incorporating dynamics. The use of different empirical techniques enables the thesis to investigate the effects of remittances on key macroeconomic aggregates across several different continents. It first uses empirical techniques to examine how remittances affect fiscal policy over the business cycle. The empirical analysis consists of developing countries that are split up into six datasets: Africa, Middle East and North Africa (MENA), Asia, Latin America, Europe and the full dataset which combines the countries from all regions into one dataset. The thesis examines the potential for remittance inflows to influence fiscal policy over the fiscal cycle. The empirical evidence confirms that remittance inflows have a direct impact on the fiscal cycle. Moreover, the full dataset confirms that remittance inflows contribute for fiscal policy to be procyclical over the fiscal cycle. The Remittances-Output gap interaction term shows a positive coefficient which could be explained by the negative impact of remittances on labour supply. Similar to previous literature, Justino and Shemyakina (2012) find that the amount of remittances received by a household has an overall negative impact on labour force participation. The main finding here is that Asia, MENA, Europe and the Latin America regions corroborate the full dataset results but the effect of remittance inflows on the cyclicality of fiscal policy is countercyclical for Africa. This thesis further investigates how the level of financial development can influence the relationship between remittances and economic growth. By incorporating how remittances can influence the financial sector with the use of cross-country panel data analysis this thesis aims to bridge the gap in the existing literature in remittances and financial development. Moreover, the creation of the financial development index is intended to capture financial sector development by bringing together several existing measures of financial development. The outcomes for the full sample indicate that there is a positive impact of remittances on economic growth with those countries that are less financially developed. The results in this regard differ for the regional datasets. Does monetary policy in developing countries influence remittance inflows? This is what Chapter five explores. It investigates how developing countries can effectively understand how monetary policy responds to remittances in the short and long run. The chapter provides analysis into the dynamics of remittances and monetary policy, whilst controlling for country specific effects. The use of impulse response analysis enables the study to capture the impact of shocks from each system variable. This chapter finds a complex web of relationships between remittances, monetary policy and economic growth. The results indicate that a depreciation in the domestic currency causes an increase in the level of remittances for the full dataset and for the other regional datasets with the exception of MENA.