Investigating the Relationship Between Remittances and Inflation in Developing and Emerging Economies: A Disaggregated Analysis Using the cross-Sectional Augmented Autoregressive Distributed Lag Approach

Remittance inflows play an important role in developing and emerging economies, with several studies suggesting a link between these inflows and higher inflation in recipient economies. This study explores how disaggregated remittance inflows—specifically how personal transfers (PERS) and compensation of employees (COMP)—influence inflation in 54 developing and emerging economies from 1996 to 2021. The analysis further examines these effects within countries of varying income levels: low-, lower-middle-, upper-middle-, and high-income countries. To conduct this analysis, second-generation methods, including the Cross-sectionally augmented Im, Pesaran, and Shin (CIPS) unit root test, the Westerlund cointegration test, and cross-sectional augmented autoregressive distributed lag (CS-ARDL). For robustness, augmented mean group (AMG) and common correlated mean group (CCEMG) estimators are also used. The estimation results show that PERS positively affect inflation, while COMP negatively impacts it in developing and emerging economies; the results are similar for the lower-middle, upper-middle, and higher-income groups. By contrast, in the lower-income group, both PERS and COMP showed a positive association with inflation. Based on these results, key policy implications are proposed.