International remittances and trade in sub-Saharan Africa: Does size matter? Evidence from endogenous dynamic panel threshold model

Abstract

Remittance has recently become an essential capital inflow, particularly for developing economies. This has generated much research interest in understanding how remittances affect developing economies. There are, however, limited studies on remittances’ influence on trade. The study extends the existing body of knowledge by assessing whether the impact of remittances on trade depends on the size of inflows. As far as we know, the existing literature has not addressed this. The study period spans from 1990 to 2018, covering 32 sub-Saharan countries. Using an endogenous dynamic panel threshold model, the results reveal that although remittance deteriorates trade balance, the rate of deterioration diminishes after an estimated threshold of 2.35 per cent of remittances as a share of GDP. The results imply that when received in small amounts (below 2.35 per cent of GDP), remittances tend to stimulate consumption, leading to increased imports. However, when received in large quantities (above 2.35 per cent of GDP), remittances boost domestic investments leading to rising exports. The results are robust to alternate estimation techniques and measurement of remittances. Based on the findings, we recommend that policymakers in SSA integrate the volume of remittances received in their macroeconomic modelling frameworks.