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The Threshold Impact of Remittances on Financial Development: New Evidence from Egypt

Mesbah Sharaf and Abdelhalem Shahen ()

No 1545, Working Papers from Economic Research Forum

Abstract: This study examines the nonlinear impact of remittances on financial development (FD) in Egypt over the period 1980-2019 while controlling for other key determinants of FD. The paper utilizes a recently developed comprehensive index of FD and uses an Autoregressive Distributed lag (ARDL) bounds testing approach to cointegration and a vector error-correction model to estimate the short- and long-run parameters of equilibrium dynamics. We find support for the complementarity hypothesis in the short run in which remittances have a statistically significant positive impact on FD. However, the results show that remittances have an inverted U-shaped impact on FD in the long run. In particular, remittances complement (substitute) FD below (above) a remittance-toGDP ratio of 7.28 percent. This implies that in the long run remittances to Egypt hinder FD when received in large quantities. We also found that financial openness has a statistically significant positive impact on FD in the long run, while inflation impedes FD. Policies aimed at increasing the flows of remittances to Egypt should mitigate its potential adverse impact on financial development

Pages: 21
Date: 2022-04-20, Revised 2022-04-20
New Economics Papers: this item is included in nep-ara, nep-fdg and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published by The Economic Research Forum (ERF)

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