Examining the Moderated-Mediation Role of the Financial Sector and Institutional Quality in the Relationship Between Remittances and Economic Growth in Developing Countries

The study examines the moderated-mediation effects of the financial sector and institutional quality in the relationship between remittances and economic growth for 68 developing economies during 2000 to 2018. For the estimation of the results, fixed-effects and two-step system GMM techniques are employed. The findings reveal that in the first stage of the moderated-mediation, remittances positively affect the financial sector and institutional quality further strengthening the relationship between both the variables. In the second stage, the financial sector acts as a mediator to enhance economic growth, and institutional quality complements the process that propels economic growth in the recipient economies. The study also extends to income-group-categorization; the upper-middle-income group has the highest moderation-mediation index, depicting that with a strong financial and institutional framework, the impact of remittances on economic growth is more pronounced. Furthermore, the effects of the moderator, institutional quality, are captured on both individual and collective levels in index form. The findings show that the most important indicators of institutional quality for bolstering the process are government effectiveness, rule of law, regulatory quality, and corruption control. These findings suggest that financial infrastructure needs to be improved to reduce transaction costs, enhance financial inclusion, and strengthening governance to build migrants’ trust to direct remittances through formal channels for promoting the long-term growth and development.