Abstract
This paper analyzes the effect of remittance inflows on external debt in developing countries, by identifying international reserves as a potential transmission channel. Using panel data over the period 1970–2017 and covering 50 low-and middle-income countries worldwide, we find a positive and significant effect of remittance inflows on the external debt-to-GDP ratio. We also find a negative and significant effect of international reserves on external debt. After controlling for international reserves, the effect of remittance inflows on external debt increases; it remains positive and significant. The results suggest that the role of international reserves as a self-insurance mechanism, and the Dutch disease effect related to remittance inflows are at play. In addition, we find negative and significant effects of economic growth and savings-investment gap on external debt. We also find positive and significant effects of the nominal exchange rate and the United States lending interest rate on external debt. We discuss the policy implications of these findings, while highlighting factors that policymakers should focus on for containing external debt in developing countries in the post-COVID-19.
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