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Remittances and Domestic Investment in Developing Countries: An Analysis of the Role of Financial Sector Development

  • Laurent Gheeraert
  • Ritha Sukadi Mata
  • Daniel Traca

This paper addresses the relationship between remittances and home country investment in developing countries. It highlights, through both a theoretical model and an empirical analysis, the role of financial sector development (FSD) in the impact of remittances on home country investment. The key contribution of the paper is to show that different transaction costs traditionally associated with the FSD, namely 'Cost of Bank Depositing' and 'Cost of External Finance', have conflicting effects on the marginal impact of remitances on investment. Our stylized model, which addresses the specificities of remittance flows through the loanable funds market, yields several intuitive results. First, the marginal impacts of remittances on bank-deposits and formal investment are positive. Second, both marginal impacts increase when the Cost of Bank Depositing declines. Third, a decrease in Cost of External Finance lowers the marginal impact on formal investment, and does not affect the marginal impact on bank deposits. Hence, since FSD lowers both transaction costs, it has an ambiguous effect on the marginal impact on investment. The empirical analysis on a sample of 100 developing countries, using both cross-section and panel-data methodologies, confirms our model's predictions.

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File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/54006/1/RePEc_sol_wpaper_10-013.pdf
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Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 10-013.RS.

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Length: 36 p.
Date of creation: 2010
Date of revision:
Publication status: Published by:
Handle: RePEc:sol:wpaper:10-013
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  1. Beck, T.H.L. & Demirgüc-Kunt, A. & Martinez Peria, M., 2008. "Banking services for everyone? Barriers to bank access and use around the world," Other publications TiSEM 667b51d6-c698-43ce-9777-e, Tilburg University, School of Economics and Management.
  2. Levine, Ross & Loayza, Norman & Beck, Thorsten, 2000. "Financial intermediation and growth: Causality and causes," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 31-77, August.
  3. Ralph Chami & Connel Fullenkamp & Samir Jahjah, 2005. "Are Immigrant Remittance Flows a Source of Capital for Development?," IMF Staff Papers, Palgrave Macmillan, vol. 52(1), pages 55-81, April.
  4. B. Gabriela Mundaca, 2009. "Remittances, Financial Market Development, and Economic Growth: The Case of Latin America and the Caribbean," Review of Development Economics, Wiley Blackwell, vol. 13(2), pages 288-303, 05.
  5. Marta Ruiz-Arranz & Paola Giuliano, 2005. "Remittances, Financial Development, and Growth," IMF Working Papers 05/234, International Monetary Fund.
  6. Jean-Paul Azam & Flore Gubert, 2005. "Those in Kayes. The Impact of Remittances on Their Recipients in Africa," Revue économique, Presses de Sciences-Po, vol. 56(6), pages 1331-1358.
  7. Nicholas P. Glytsos, 2005. "The contribution of remittances to growth: A dynamic approach and empirical analysis," Journal of Economic Studies, Emerald Group Publishing, vol. 32(5), pages 468-496, October.
  8. Catalina Amuedo-Dorantes & Susan Pozo, 2006. "Remittances as insurance: evidence from Mexican immigrants," Journal of Population Economics, Springer, vol. 19(2), pages 227-254, June.
  9. Beck, Thorsten & Demirguc-Kunt, Asli & Martinez Peria, Maria Soledad, 2005. "Reaching out : access to and use of banking services across countries," Policy Research Working Paper Series 3754, The World Bank.
  10. repec:ner:tilbur:urn:nbn:nl:ui:12-3159645 is not listed on IDEAS
  11. repec:ner:tilbur:urn:nbn:nl:ui:12-3125424 is not listed on IDEAS
  12. Thomas H.W. Ziesemer, 2009. "Worker Remittances and Growth: The Physical and Human Capital Channels," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 229(6), pages 743-773, December.
  13. repec:ner:tilbur:urn:nbn:nl:ui:12-3125518 is not listed on IDEAS
  14. McKenzie, David & Sasin, Marcin J., 2007. "Migration, remittances, poverty, and human capital : conceptual and empirical challenges," Policy Research Working Paper Series 4272, The World Bank.
  15. repec:ner:tilbur:urn:nbn:nl:ui:12-3125425 is not listed on IDEAS
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