Remittance-Growth Nexus in the developing economies: Does financial sector development matter?

Abstract

This research looks at how changes in the financial industry have affected the relationship between developing nations' economies and remittance inflows. While remittances constitute a vital external financing source, their growth-enhancing potential is contingent upon the structural characteristics, scale, and operational efficiency of the recipient countries’ financial systems. Employing a comprehensive panel dataset from leading remittance-receiving countries, the analysis incorporates seven distinct indicators capturing three core aspects of monetary advancement: total size, breadth of institutions, and effectiveness of operations. The empirical results uncover a nuanced dynamic wherein the financial sector’s size and depth primarily substitute for remittance effects by mitigating credit constraints, whereas financial efficiency amplifies the positive influence of remittances by enabling their more productive allocation. These findings challenge simplistic, one-dimensional views of financial development and underscore the necessity of adopting a multifaceted framework to fully comprehend how remittances stimulate economic growth. Policy implications emphasize the strategic enhancement and optimization of financial institutions to maximize the advantages for the growth and advancement of migrant remittances in emerging economies.