Abstract
Investigating the remittance-financial development relationship is an ongoing endeavour among economists and policymakers. Building and improving on the existing work, this study considers the possibility that the relationship between remittances and financial development is potentially asymmetric. We apply the linear ARDL and capture the possibility of an asymmetrical relationship by applying the Non-Linear Autoregressive Model (NARDL) advanced by Shin et al. (2014). Using NARDL, we were able estimate the short-run and long-run asymmetric responses of financial development through positive and negative partial-sum decompositions of changes in remittances. To assess the robustness of the ARDL and NARDL estimates, we employed the fully modified ordinary least squares (FMOLS). Annual data series from 1980 to 2017 derived from the World Development Indicators, Fred Economic data and Penn World Tables were used for this study. The estimations obtained from the ARDL and NARDL models reveal some evidence of a long-run relationship between the dependent and independent variables of interest. Specifically, the ARDL results present a significantly positive estimate of remittances on financial development in the long-run. While the NARDL estimation suggest that positive and negative shocks of remittances bring about positive and negative effects on financial development in the long-run, respectively: a percentage (%) increase in the remittances brings about a 0.121568% increase in financial development, whereas a 1% decrease in remittances produces a 0.33363% decrease in financial development. Perhaps reassuringly, the results derived from the non-linear versions of FMOLS are quantitatively similar to those of NARDL— suggesting that remittances have an asymmetric effect on financial development in the long run: an increase in remittances is accompanied by an increase in financial development while a decrease in remittances gives rise to a decrease in financial development.
Keywords: Remittances, financial development, domestic credit.