Remittances and Financial Openness

Michel Beine, Elisabetta Lodigiani () and Robert Vermeulen

DEM Discussion Paper Series from Department of Economics at the University of Luxembourg

Abstract: Remittances have greatly increased during recent years, becoming an important and reliable source of funds for many developing countries. Therefore, there is a strong incentive for receiving countries to attract more remittances, especially through formal channels. One way of doing so is to increase their financial openness, but this is not without costs. More specifically for developing countries, governments need to weight the positive effects of remittances with the additional risks in terms of macroeconomic volatility associated to financial openness. In this paper we investigate the link between remittance receipts and financial openness. We develop a small model and statistically test for the existence of such a relationship with a sample of 66 mostly developing countries from 1980-2005. Empirically we use a dynamic generalized ordered logit model to deal with the categorical nature of the financial openness policy. We account for the persistence of financial openness, initial conditions, trade openness, institutional quality and domestic financial development. In addition, we apply a two-step method akin to two stage least squares to deal with the potential endogeneity of remittances. We find a strong positive effect of remittances on financial openness, i.e. the more remittances a country receives, the more likely it will be financially open. This positive effect is both statistically significant and economically large.

JEL-codes: E60 F24 F41 O10 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-dev, nep-mac and nep-mig
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Remittances and financial openness (2012)
Working Paper: Remittances and Financial Openness (2010)
Working Paper: Remittances and Financial Openness (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:09-09

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