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Remittances and Financial Openness

  • Michel Beine

    ()

    (CREA, University of Luxembourg and CES-Ifo)

  • Elisabetta Lodigiani

    ()

    (CREA, University of Luxembourg and Centro Studi Luca d’Agliano)

  • Robert Vermuelen

    ()

    (CREA, University of Luxembourg and Maastricht University)

Remittances have greatly increased during recent years, becoming an important and reliable source of funds for many developing countries. Therefore, there is a strong incentive for receiving countries to attract more remittances, especially through formal channels that turn to be either less expensive or less risky. One way of doing so is to increase their financial openness, but this policy option might generate additional costs in terms of macroeconomic volatility. In this paper we investigate the link between remittance receipts and financial openness. We develop a small model and statistically test for the existence of such a relationship with a sample of 66 mostly developing countries from 1980-2005. Empirically we use a dynamic generalized ordered logit model to deal with the categorical nature of the financial openness policy. We apply a two-step method akin to two stage least squares to deal with the endogeneity of remittances and potential measurement errors. We find a strong positive statistical and economic effect of remittances on financial openness.

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Paper provided by Centro Studi Luca d'Agliano, University of Milano in its series Development Working Papers with number 299.

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Length: 52
Date of creation: 30 Nov 2010
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Handle: RePEc:csl:devewp:299
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