Financial Development and Remittances in Africa and the Americas: A Panel Unit-Root Tests and Panel Cointegration Analysis

Bichaka Fayissa and Christian Nsiah

No 201201, Working Papers from Middle Tennessee State University, Department of Economics and Finance

Abstract: In view of the sizable increase in recorded migrant workers’ remittances to developing countries from $70 billion in 2000 to $167 in 2005, this study investigates the long-run relationship between remittances and financial services development (FSD) and control variables including exchange rate (ERS), the size of migrant stock (MSK), the domestic per capita income (DPC) in the receiving country and foreign per capita income (FPC) in the main host country. We use a newly developed panel fully modified OLS (PFMOLS) on annual panel data over the 1985-2007 period for 44 countries consisting of 25 from Africa and 19 from the Americas. It is found that financial development, exchange rate stability, and the size of migrant stock have positive and statistically significant effect on remittances in both regions and in each of the regions. The study has important policy implications for the role of the financial services development through domestic credit expansion by the banking industry as well as increased competition among money transfer operations and exchange rate stability in order to promote the continuation of remittance inflows as a major source of economic growth in Africa and the Americas. The study also shows that there are regional differences in the impact and magnitude of the determinants of remittances.

Keywords: Workers’ Remittances; Transaction Cost Factors; Per Capita income; Unit-Root tests; Error Correction Model; PFMOOLS; Panel Data; Africa and the Americas (search for similar items in EconPapers)
JEL-codes: E21 F21 G22 J61 O16 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-afr, nep-mac and nep-mig
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:mts:wpaper:201201

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