Financial Development Thresholds and the Remittances-Growth Nexus

Abstract

This study provides new evidence on the relationship between remittances and economic growth using system GMM on dynamic panel and panel threshold regression (PTR) model proposed by Hansen (J Econ 93:334–368, 1999) that authorized multiple thresholds. The sample consists of 60 developing countries from 1985 to 2015. The empirical results indicate that there is a threshold effects of financial development in the remittances-growth relationship. Beyond a given threshold of financial development, there is a positive relationship between remittances and economic growth, while, this relationship is insignificant under the threshold. Specifically, remittances will be more likely to contribute to economic in recipient countries with relatively well-functioning financial sectors. Since financial development seems to matter in the manner in which remittances are used, the best way for recipient country governments to ensure that remittances contribute to positive economic growth is to foster financial sectors, thus ensuring that a greater proportion of remittances are channeled in a more effective way to have a positive impact on growth.