Abstract
The study's motivation is to gauge the effects of remittances on openness: financial and economic openness and financial stability in least developed countries (LDCs) for the period spanning 1975–2018. The study applies Generalized Moment of Methods (GMM) and System-GMM to detect the magnitude of remittances, gross capital formation, and government debt on openness and financial stability, and their directional association is established by performing a Granger causality test with System-GMM specification. The results of cross-sectional dependency ascertain the presence of a common dynamic among the research units; on the other hand, both first, and second-generation unit root tests establish that variables are integrated either at level or after the first difference, neither variables are exposed to order of integration after second difference. A panel co-integration test based on error correction confirms the availability of the long-run association among variables. Study findings with GMM and System-GMM estimation expose positive statistically significant effects of remittance inflows to economic and financial openness and financial stability. In LDCs, remittance inflows positively augment economic and financial openness; moreover, financial stability remittances play a critical role. The study implemented the Granger causality test with System-GMM specification, and results disclosed the feedback hypothesis that is bidirectional causality availability in the tested empirical causal model.JEL Classifications: F24, F43, P34.
Highlights
Remittances to developing countries go first and foremost to lower-middle-income and low-income countries
All countries are interested in international aid remittances; since they represent a large influx of financial capital; both industrialized and emerging economies are drawn to each other (Chami et al, 2005; Stojanov et al, 2019)
Where p represents the optimal lag length, which is determined by using Akaike’s information criterion (AIC), we found that optimal lag for the estimation is 2, ECT stands for error correction term for assessing long-run causality, and eit for the error term
Summary
Remittances to developing countries go first and foremost to lower-middle-income and low-income countries. We intended to explore fresh evidence regarding the impact of remittances on economic openness and the role of establishing financial stability by considering a panel of 40 least developed countries (LDCs) for the period spanning 1975–2018. Study findings expose positive and statistically significant effects running from remittances to openness and financial stability.
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