Heterogeneity in the long-run remittance-output relationship: Theory and new evidence

Abstract

The existing literature focuses extensively on the macroeconomic impact of remittances. Yet, the plausible heterogeneity in the remittance-output relationship is understudied. Different country characteristics and mediating factors of remittances suggest that the remittance-output relationship may vary across countries. Uncovering this cross-country heterogeneity can help tailor country-specific policies in managing the aggregate effects of remittances. We use panel data for 80 developing countries over 1970–2014 to systematically study the heterogeneous long-run remittance-output relationship. We find that an increase in remittances is associated with a marginal increase in long-run output on average. This, however, conceals a large cross-country heterogeneity, which uncovers that the impact of remittances on output varies from 0.59% in Dominican Republic to −0.53% in Bosnia and Herzegovina. Differences in the size/sign of the impact of remittances on consumption and investment across countries explain this variation. This cautions against a one-size-fits-all argument for the aggregate impact of remittances.