Abstract
In this study, we investigate the impact of remittances and foreign aid (official foreign assistance) on investment and saving in South Asian countries. We also analyze the comparative influence of remittances and foreign aid in stimulating saving and investment. We use a sample of five South Asian countries over the period 1985-2018 and employ OLS and 2SLS methods to estimate the effect of remittance and foreign aid on saving and investment. The result reveals that remittance has a positive impact on saving but has no significant effect on investment and shows that foreign aid has no significant impact on saving but negatively influences investment. In line with our results, a rise in 10 percent of remittances in South Asia raises savings by 1.6 percent in the OLS estimates and by 1.7 percent when we use 2SLS. At the same time for a 10% increase in foreign aid decreases saving by 4.3% and 3.3%, respectively, in two methods. For the second regression, an increase in 10% remittances hamper investment by 1.3% and 1% for OLS and 2SLS, respectively. And for the analogous 10% increase in foreign aid decrease investment by 5.4% and 5.2%, respectively. However, if foreign aid is efficiently used, it can be an important complement to remittances by permitting households to overcome the minimum threshold level and they can use a bigger portion of their remittances for savings and investment motive.
Highlights
The cohesion between the trade balance and the exchange rate has a lingering history
In terms of policy implications, the results show that exchange rate can be used as a crucial tool to ameliorate the trade balance in the long run
Adopting the Toda-Yamamoto (Toda and Yamamoto, 1995) procedure for Granger Causality in an augmented VAR frame-work, the unidirectional causal relation is established from exchange rate to trade balance
Summary
The cohesion between the trade balance and the exchange rate has a lingering history. Studies that attempted to test the phenomenon whereas used aggregate trade data between one country and rest of the world .According to many researchers as Hossain and Alauddin (2005), Aziz (2008) the main objectives of exchange rate changes in Bangladesh are to easing international competitiveness, encourage exports diversification, discourage imports growth, rearrange resources in import substitutes and export oriented sectors, encourage remittances inflow from expatriate wage earners, maintain stable internal price, and maintain a viable external account position. Our research work is different from others in the sense that we are going to employ the bilateral trade data of Bangladesh and united states of America and want to test the existence of j curve phenomenon in the trade balance and exchange rate relationship within this two country’s data, for the sake of avoiding the aggregation bias problem we avoid the aggregate trade balance data of Bangladesh with its all trading partners. Many prominent economists believe that undervaluation promotes growth because it motivates firms to invest in high productivity tradable industries, which increases overall productivity rates (Rodrik, 2008)
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