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Remittances and Financial Openness

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  • Michel Beine
  • Elisabetta Lodigiani
  • Robert Vermeulen

    ()
    (CREA, University of Luxembourg)

Abstract

Remittances have greatly increased during recent years, becoming an important and reliable source of funds for many developing countries. Therefore, there is a strong incentive for receiving countries to attract more remittances, especially through formal channels. One way of doing so is to increase their financial openness, but this is not without costs. More specifically for developing countries, governments need to weight the positive effects of remittances with the additional risks in terms of macroeconomic volatility associated to financial openness. In this paper we investigate the link between remittance receipts and financial openness. We develop a small model and statistically test for the existence of such a relationship with a sample of 66 mostly developing countries from 1980-2005. Empirically we use a dynamic generalized ordered logit model to deal with the categorical nature of the financial openness policy. We account for the persistence of financial openness, initial conditions, trade openness, institutional quality and domestic financial development. In addition, we apply a two-step method akin to two stage least squares to deal with the potential endogeneity of remittances. We find a strong positive effect of remittances on financial openness, i.e. the more remittances a country receives, the more likely it will be financially open. This positive effect is both statistically significant and economically large.

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Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 09-09.

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Date of creation: 2009
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Handle: RePEc:luc:wpaper:09-09

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Cited by:
  1. Simone Bertoli & Jesus Fernández-Huertas Moraga, 2012. "Visa Policies, Networks and the Cliff at the Border," Working Papers 2012-12, FEDEA.
  2. Michael Funke & Yu-Fu Chen, 2010. "Global warming and extreme events: Rethinking the timing and intensity of environment policy," Quantitative Macroeconomics Working Papers, Hamburg University, Department of Economics 21007b, Hamburg University, Department of Economics.
  3. Michel Beine & Elisabetta Lodigiani & Robert Vermeulen, 2011. "Remittances and Financial Openness," DNB Working Papers, Netherlands Central Bank, Research Department 317, Netherlands Central Bank, Research Department.
  4. Vincent BODART & Bertrand CANDELON & Jean-François CARPANTIER, 2011. "Real Exchange Rates, Commodity Prices and Structural Factors in Developing Countries," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2011045, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  5. Jesús Crespo Cuaresma & Martin Feldkircher, 2012. "Drivers of Output Loss during the 2008–09 Crisis: A Focus on Emerging Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 46-64.
  6. Josef Schreiner, 2012. "Developments in Selected CESEE Countries: Heterogeneous Growth Performance, Improving Fiscal and External Accounts," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 8-37.
  7. Adolfo Barajas & Ralph Chami & Christian Ebeke & Sampawende J.-A. Tapsoba, 2012. "Workers’ Remittances," IMF Working Papers 12/251, International Monetary Fund.
  8. Kosse, Anneke & Vermeulen, Robert, 2014. "Migrants’ Choice of Remittance Channel: Do General Payment Habits Play a Role?," World Development, Elsevier, vol. 62(C), pages 213-227.

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