Does institutional quality and remittances inflow crowd-in private investment to avoid Dutch Disease? A case for emerging seven (E7) economies

Abstract

This study investigates the role of remittances and institutional quality in promoting private investment for emerging seven (E7) economies. This study further analyzes whether the private investment is crow-out due to Dutch disease phenomena or a crow-in. This study uses advanced panel data econometric tools to achieve the study's desired objectives, i.e., Pesaran second-generation unit root test, Westerlund cointegration, and cross-sectionally augmented ARDL for the period 1990–2019. Moreover, this study also added an interactive term for remittance inflow and institutional quality to see both terms' joint effect. Similarly, the role of gross domestic product and financial risk is also analyzed in this study. This study's outcomes show that increasing remittance inflow does cause Dutch disease; however, improvement in institutional quality and its joint effect with remittance inflow on private investment is positive and nullifies the phenomena of Dutch disease. Moreover, an increasing gross domestic product causes private investment to grow. On the other hand, increasing financial risk in emerging seven economies cause private investment to decline. Based on our empirical findings, this study indicates that improvement in institutional quality and channelizing inflow of remittance, and overcoming financial risk shall help promote private investment in these countries.