Abstract
This study investigates how remittances and monetary policy independently and interactively shape the financial system of developing countries. It employs single equation instrumental variable based estimation procedures to test the hypothesis that, to boost financial development, remittances require a complementary domestic monetary policy framework which ensures price stability while limiting price distortions. The results show that remittances stimulate financial development only in countries with a favourable monetary environment. Building on these results and employing various indicators of financial development, the results suggest that remittances rise to cushion migrant households from the repercussions of poor financial intermediation, weak institutions and unfavourable business environment in the home country. By extension, the findings are germane to monetary and financial policy in developing countries. Keywords: Remittances, Monetary Policy, Financial Development, Developing Country, Financial Development Index
Highlights
The empirical work on the finance-growth nexus has almost unequivocally pronounced finance as imperative for long term growth (Hsueh, Hu & Tu, 2013; Jedidia, Boujelbène & Helali, 2014; Komal & Abbas, 2015; Levine, 2005)
The study commenced the empirical inquiry by examining the independent effects of each of remittances and monetary conditions on financial development using instrumental variable based procedures
It reveals that favourable monetary conditions in remittance receiving countries promote financial development
Summary
The empirical work on the finance-growth nexus has almost unequivocally pronounced finance as imperative for long term growth (Hsueh, Hu & Tu, 2013; Jedidia, Boujelbène & Helali, 2014; Komal & Abbas, 2015; Levine, 2005). The focus of the literature has moved towards finding answers as to why some economies have better financial systems than others (Baltagi, Demetriades & Law, 2009). In this regard, the objective of this paper is to explore whether remittances, the monetary framework and their interactions can deliver improvements in financial development to the developing world, where such improvements are needed most. (with the exception of market capitalisation excluding top 10 companies and stock price volatility), DCs perform below the global average, and even further below their developed counterparts. A dysfunctional financial system obstructs growth, limits economic openings, breads economic instability (Cihak, Demirgüç-Kunt, Feyen & Levine, 2012), wastes resources, and hinders innovation
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