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Financial Liberalization and Remittances: Recent Longitudinal Evidence

  • Bang, James T.

    ()

    (St. Ambrose University)

  • Mitra, Aniruddha

    ()

    (Bard College)

  • Wunnava, Phanindra V.

    ()

    (Middlebury College)

This paper investigates the impact of financial liberalization on remittances to 84 countries over five-year intervals from 1990-2005 based on the difference-GMM method of Arellano and Bond (1991). We find that various dimensions of financial reform impact remittances differently. Increased economic freedom in the financial sector, captured by absence of direct government control over the allocation of credit, has a positive and immediate impact. Improved robustness of financial markets, captured by the effective and apolitical regulations and other policies that enhance financial markets, has a negative, lagged effect. The net combined impact of these effects suggests that the long-run effect of an across-the-board reform on remittances is slightly negative. Our results suggest that countries using liberalization to cope with external imbalances will find that granting greater financial freedom will help by attracting higher levels of remittances. However, countries using liberalization to reduce their exposure to external risks will find that policies that enhance the robustness of domestic financial markets to be more effective.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7497.

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Length: 27 pages
Date of creation: Jul 2013
Handle: RePEc:iza:izadps:dp7497
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