IDEAS home Printed from https://ideas.repec.org/a/eee/jpolmo/v41y2019i2p336-351.html
   My bibliography  Save this article

Remittance volatility and financial sector development in sub-Saharan African countries

Author

Listed:
  • Opperman, Pieter
  • Adjasi, Charles Komla Delali

Abstract

In this study we examine the relationship between remittances, remittance volatility and financial sector development in sub-Saharan Africa using a two-step system GMM estimator over the period 2002–2014. Separately focussing on banking sector- and stock market development, our study distinguishes between the effect of remittances and remittance volatility on financial sector depth and financial sector efficiency. The results indicate remittances act as a substitute for the formal banking system in sub-Saharan African countries. We further provide evidence that remittance volatility is detrimental to both banking sector depth and efficiency. No evidence is found that remittance volatility is related to stock market development. A policy implication from our study is that sub-Saharan African countries should have measures in place to monitor the predictability of remittances while the cost of remittance transfer needs to be investigated.

Suggested Citation

  • Opperman, Pieter & Adjasi, Charles Komla Delali, 2019. "Remittance volatility and financial sector development in sub-Saharan African countries," Journal of Policy Modeling, Elsevier, vol. 41(2), pages 336-351.
  • Handle: RePEc:eee:jpolmo:v:41:y:2019:i:2:p:336-351
    DOI: 10.1016/j.jpolmod.2018.11.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0161893818301522
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Baltagi, Badi H. & Demetriades, Panicos O. & Law, Siong Hook, 2009. "Financial development and openness: Evidence from panel data," Journal of Development Economics, Elsevier, vol. 89(2), pages 285-296, July.
    2. Charles Amo Yartey, 2007. "Well-developed Financial Intermediary Sector Promotes Stock Market Development," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 6(3), pages 269-289, December.
    3. Demirguc-Kunt, Asli & Huizinga, Harry, 2000. "Financial structure and bank profitability," Policy Research Working Paper Series 2430, The World Bank.
    4. Coulibaly, Dramane, 2015. "Remittances and financial development in Sub-Saharan African countries: A system approach," Economic Modelling, Elsevier, vol. 45(C), pages 249-258.
    5. Aga, Gemechu Ayana & Soledad Martinez Peria, Maria, 2014. "International remittances and financial inclusion in Sub-Saharan Africa," Policy Research Working Paper Series 6991, The World Bank.
    6. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    7. Imai, Katsushi S. & Gaiha, Raghav & Ali, Abdilahi & Kaicker, Nidhi, 2014. "Remittances, growth and poverty: New evidence from Asian countries," Journal of Policy Modeling, Elsevier, vol. 36(3), pages 524-538.
    8. Bugamelli, Matteo & Paternò, Francesco, 2009. "Do Workers' Remittances Reduce the Probability of Current Account Reversals?," World Development, Elsevier, vol. 37(12), pages 1821-1838, December.
    9. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    10. Kevin Williams, 2016. "Remittances and Financial Development: Evidence from Sub-Saharan Africa," African Development Review, African Development Bank, vol. 28(3), pages 357-367, September.
    11. Giuliano, Paola & Ruiz-Arranz, Marta, 2009. "Remittances, financial development, and growth," Journal of Development Economics, Elsevier, vol. 90(1), pages 144-152, September.
    12. Gupta, Sanjeev & Pattillo, Catherine A. & Wagh, Smita, 2009. "Effect of Remittances on Poverty and Financial Development in Sub-Saharan Africa," World Development, Elsevier, vol. 37(1), pages 104-115, January.
    13. Syed Raza & Syed Jawaid, 2014. "Foreign capital inflows, economic growth and stock market capitalization in Asian countries: an ARDL bound testing approach," Quality & Quantity: International Journal of Methodology, Springer, vol. 48(1), pages 375-385, January.
    14. Hauner, David, 2009. "Public debt and financial development," Journal of Development Economics, Elsevier, vol. 88(1), pages 171-183, January.
    15. Chowdhury, Mamta B., 2011. "Remittances flow and financial development in Bangladesh," Economic Modelling, Elsevier, vol. 28(6), pages 2600-2608.
    16. Mahalia Jackman & Roland Craigwell & Winston Moore, 2009. "Economic volatility and remittances: evidence from SIDS," Journal of Economic Studies, Emerald Group Publishing, vol. 36(2), pages 135-146, May.
    17. Edward F. Blackburne III & Mark W. Frank, 2007. "Estimation of nonstationary heterogeneous panels," Stata Journal, StataCorp LP, vol. 7(2), pages 197-208, June.
    18. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
    19. Richard P. C. Brown & Fabrizio Carmignani & Ghada Fayad, 2013. "Migrants’ Remittances and Financial Development: Macro- and Micro-Level Evidence of a Perverse Relationship," The World Economy, Wiley Blackwell, vol. 36(5), pages 636-660, May.
    20. Demirgüç-Kunt, Asli & Córdova, Ernesto López & Pería, María Soledad Martínez & Woodruff, Christopher, 2011. "Remittances and banking sector breadth and depth: Evidence from Mexico," Journal of Development Economics, Elsevier, vol. 95(2), pages 229-241, July.
    21. Broto, Carmen & Díaz-Cassou, Javier & Erce, Aitor, 2011. "Measuring and explaining the volatility of capital flows to emerging countries," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 1941-1953, August.
    22. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    23. Freund, Caroline & Spatafora, Nikola, 2008. "Remittances, transaction costs, and informality," Journal of Development Economics, Elsevier, vol. 86(2), pages 356-366, June.
    24. Michael Coon, 2014. "Financial development and the end-use of migrants' remittances," IZA Journal of Labor & Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 3(1), pages 1-25, December.
    25. Billmeier, Andreas & Massa, Isabella, 2009. "What drives stock market development in emerging markets--institutions, remittances, or natural resources?," Emerging Markets Review, Elsevier, vol. 10(1), pages 23-35, March.
    26. Taiwo Ajilore & Sylvanus Ikhide, 2012. "A Bounds Testing Analysis of Migrants Remittances and Financial Development in Selected Sub-Sahara African Countries," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 4(2), pages 079-096, December.
    27. Annen, Kurt & Batu, Michael & Kosempel, Stephen, 2016. "Macroeconomic effects of foreign aid and remittances: Implications for aid effectiveness studies," Journal of Policy Modeling, Elsevier, vol. 38(6), pages 1136-1146.
    28. Rolando Avendano & Norbert Gaillard & Sebastián Nieto-Parra, 2011. "Are working remittances relevant for credit rating agencies?," Post-Print hal-00813587, HAL.
    29. Mandelman, Federico S., 2013. "Monetary and exchange rate policy under remittance fluctuations," Journal of Development Economics, Elsevier, vol. 102(C), pages 128-147.
    30. Charles Komla Adjasi & Charles Amo Yartey, 2007. "Stock Market Development in Sub-Saharan Africa; Critical Issues and Challenges," IMF Working Papers 07/209, International Monetary Fund.
    31. Valeriano F. García & Lin Liu, 1999. "Macroeconomic Determinants of Stock Market Development," Journal of Applied Economics, Universidad del CEMA, vol. 2, pages 29-59, May.
    32. Lee, Hyun-Hoon & Park, Cyn-Young & Byun, Hyung-suk, 2013. "Do contagion effects exist in capital flow volatility?," Journal of the Japanese and International Economies, Elsevier, vol. 30(C), pages 76-95.
    33. Jouini, Jamel, 2015. "Economic growth and remittances in Tunisia: Bi-directional causal links," Journal of Policy Modeling, Elsevier, vol. 37(2), pages 355-373.
    34. Huang, Yongfu, 2010. "Political Institutions and Financial Development: An Empirical Study," World Development, Elsevier, vol. 38(12), pages 1667-1677, December.
    35. Demirguc-Kunt, Asli & Huizinga, Harry, 2004. "Market discipline and deposit insurance," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 375-399, March.
    36. Carlos Vargas-Silva, 2007. "Measuring the macroeconomic impact of workers' remittances in a data-rich environment," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(6), pages 359-363.
    37. Catalina Amuedo-Dorantes & Susan Pozo, 2012. "Remittance Income Volatility and Labor Supply in Mexico," Southern Economic Journal, Southern Economic Association, vol. 79(2), pages 257-276, October.
    38. Aggarwal, Reena & Demirgüç-Kunt, Asli & Pería, Maria Soledad Martínez, 2011. "Do remittances promote financial development?," Journal of Development Economics, Elsevier, vol. 96(2), pages 255-264, November.
    39. Catalina Amuedo-Dorantes & Susan Pozo, 2014. "Remittance income uncertainty and asset accumulation," IZA Journal of Labor & Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 3(1), pages 1-24, December.
    40. Cooray, Arusha, 2012. "Migrant remittances, financial sector development and the government ownership of banks: Evidence from a group of non-OECD economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 936-957.
    41. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
    42. Nyamongo, Esman Morekwa & Misati, Roseline N. & Kipyegon, Leonard & Ndirangu, Lydia, 2012. "Remittances, financial development and economic growth in Africa," Journal of Economics and Business, Elsevier, vol. 64(3), pages 240-260.
    43. repec:ags:stataj:119268 is not listed on IDEAS
    44. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
    45. Ahmat Jidoud, 2015. "Remittances and Macroeconomic Volatility in African Countries," IMF Working Papers 15/49, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Remittance volatility; Financial development; Panel data;

    JEL classification:

    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jpolmo:v:41:y:2019:i:2:p:336-351. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/505735 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.