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Does development finance pose an additional risk to monetary policy?

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  • Haruna, Issahaku
  • Harvey, Simon K.
  • Abor, Joshua Y.

Abstract

This study investigates whether remittances entail extra risk for macroeconomic policy management and examines the role (if any) that the financial system can play in the interaction between remittances and monetary policy. Employing panel data for 106 developing countries from 1970 to 2013, the results from our panel vector autoregressive (PVAR) model reveal that remittance volatility reduces macroeconomic risk in developing countries while simultaneously stimulating a reduction in domestic interest rates. This finding remains robust to alternative specifications of remittance volatility and monetary policy risk and to variations in the degree of financial development. The key lesson from this study is that developing countries can leverage the positive impact of remittances in reducing macroeconomic instability by implementing policies that induce remittances.

Suggested Citation

  • Haruna, Issahaku & Harvey, Simon K. & Abor, Joshua Y., 2016. "Does development finance pose an additional risk to monetary policy?," MPRA Paper 101637, University Library of Munich, Germany, revised 10 Jul 2016.
    • Handle: RePEc:pra:mprapa:101637
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    2. Anarfo, Ebenezer Bugri & Abor, Joshua Yindenaba & osei, Kofi Achampong, 2020. "Financial regulation and financial inclusion in Sub-Saharan Africa: Does financial stability play a moderating role?," Research in International Business and Finance, Elsevier, vol. 51(C).
    3. Dominic Atogumsekiya Anarigide & Haruna Issahaku & Stanley Kojo Dary, 2023. "Drivers of financial innovation in sub-Saharan Africa," SN Business & Economics, Springer, vol. 3(9), pages 1-21, September.
    4. Ustarz, Yazidu & Haruna, Issahaku, 2017. "International Migrant Remittance and Productivity Growth in Ghana," MPRA Paper 101579, University Library of Munich, Germany, revised 18 Jun 2017.
    5. Olumuyiwa Tolulope Apanisile, 2021. "Remittances, financial development and the effectiveness of monetary policy transmission mechanism in Nigeria: a DSGE approach (1986–2018)," Indian Economic Review, Springer, vol. 56(1), pages 91-112, June.
    6. Folorunsho M. Ajide & James T. Dada, 2023. "Poverty, entrepreneurship, and economic growth in Africa," Poverty & Public Policy, John Wiley & Sons, vol. 15(2), pages 199-226, June.
    7. Issahaku, Haruna & Abor, Joshua Yindenaba & Harvey, Simon Kwadzogah, 2017. "Remittances, banks and stock markets: Panel evidence from developing countries," Research in International Business and Finance, Elsevier, vol. 42(C), pages 1413-1427.
    8. Manuel Ennes Ferreira & João Dias & Jelson Serafim, 2022. "Stock Market and Economic Growth: Evidence from Africa," Working Papers REM 2022/0228, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.

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    More about this item

    Keywords

    Does development finance pose an additional risk to monetary policy?;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • F3 - International Economics - - International Finance

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