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Do remittances impact the economy? Some empirical evidences from a developing economy

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  • Hrushikesh Mallick

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    (Centre for Development Studies)

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    Abstract

    The study attempts to examine the impact of remittances on macroeconomic activities (private consumption and investment) and its implications on economic growth in India for the period from 1966-67 to 2003-04. Estimating a general consumption model, the results indicate that remittances along with debt, money supply (net of bank demand deposits) and income, consistently have a positive influence on private consumption. This suggests that as usually the case for a developing economy, the effect of remittances is not different from that of income indicating income effect of remittances. The result also implies that government debt is perceived as net wealth by the private sector. With the increase in public debt, private sector perceives that their wealth is also getting increased and as a result they tend to spend more on consumption ignoring its implications in terms of future tax burden that they have to incur. Further, examining the impact of remittances on private investment and output growth, the study finds that although remittances do adversely affect private investment but the growth rate of remittances do not influence on the growth rate of output in the economy. This is something quite puzzling. However, on the basis of no growth effect of remittances, the study suggests that the government policy should be designed towards inducing the private sector to allocate more for productive investments for leveling up the rate of growth. Otherwise significant a proportion of remittances would result in increases in private consumption without any contributory impact on the economy.

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    Bibliographic Info

    Paper provided by Centre for Development Studies, Trivendrum, India in its series Centre for Development Studies, Trivendrum Working Papers with number 407.

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    Length: 53 pages
    Date of creation: Oct 2008
    Date of revision:
    Handle: RePEc:ind:cdswpp:407

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    Related research

    Keywords: Remittances; consumption; Investment; Growth; Interest;

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    1. Martin Feldstein, 1980. "Government Deficits and Aggregate Demand," NBER Working Papers 0435, National Bureau of Economic Research, Inc.
    2. Cebula, Richard J, 1985. "Crowding Out and Fiscal Policy in the United States: A Note on the Recent Experience," Public Finance = Finances publiques, , vol. 40(1), pages 133-36.
    3. Rapoport, Hillel & Docquier, Frédéric, 2005. "The Economics of Migrants’ Remittances," IZA Discussion Papers 1531, Institute for the Study of Labor (IZA).
    4. Miguel León-Ledesma & Matloob Piracha, 2001. "International Migration and the Role of Remittances in Eastern Europe," Studies in Economics 0113, Department of Economics, University of Kent.
    5. Mihir A. Desai & Devesh Kapur & John McHale, 2004. "Sharing the Spoils: Taxing International Human Capital Flows," International Tax and Public Finance, Springer, vol. 11(5), pages 663-693, 09.
    6. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
    7. John Connell, 2000. "Migration and remittances in island microstates: a comparative perspective on the South Pacific and the Caribbean," International Journal of Urban and Regional Research, Wiley Blackwell, vol. 24(1), pages 52-78, 03.
    8. Kormendi, Roger C, 1983. "Government Debt, Government Spending, and Private Sector Behavior," American Economic Review, American Economic Association, vol. 73(5), pages 994-1010, December.
    9. Alexei Kireyev, 2006. "The Macroeconomics of Remittances," IMF Working Papers 06/2, International Monetary Fund.
    10. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-27, March.
    11. Joshua Greene & Delano Villanueva, 1991. "Private Investment in Developing Countries: An Empirical Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 33-58, March.
    12. Djajic, Slobodan, 1986. "International migration, remittances and welfare in a dependent economy," Journal of Development Economics, Elsevier, vol. 21(2), pages 229-234, May.
    13. Ralph Chami & Connel Fullenkamp & Samir Jahjah, 2005. "Are Immigrant Remittance Flows a Source of Capital for Development?," IMF Staff Papers, Palgrave Macmillan, vol. 52(1), pages 55-81, April.
    14. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    15. Lucas, Robert E B & Stark, Oded, 1985. "Motivations to Remit: Evidence from Botswana," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 901-18, October.
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