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Remittances, financial development, and growth

  • Giuliano, Paola
  • Ruiz-Arranz, Marta

Despite the increasing importance of remittances in total international capital flows, the relationship between remittances and growth has not been adequately studied. This paper studies one of the links between remittances and growth, in particular how local financial sector development influences a country's capacity to take advantage of remittances. Using a newly-constructed dataset for remittances covering about 100 developing countries, we find that remittances boost growth in countries with less developed financial systems by providing an alternative way to finance investment and helping overcome liquidity constraints. This finding controls for the endogeneity of remittances and financial development, does not depend on the particular measure of financial sector development used, and is robust to a number of robustness tests, including threshold estimation. We also provide evidence that there could be an investment channel trough which remittances can promote growth especially when the financial sector does not meet the credit needs of the population.

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Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 90 (2009)
Issue (Month): 1 (September)
Pages: 144-152

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Handle: RePEc:eee:deveco:v:90:y:2009:i:1:p:144-152
Contact details of provider: Web page: http://www.elsevier.com/locate/devec

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