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What drives bilateral remittances to Pakistan? A gravity model approach

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  • Ahmed, Junaid
  • Martinez-Zarzoso, Inmaculada

Abstract

Formal remittance flows to Pakistan have shown noticeable growth over the past decade. Using bilateral remittance data for 23 major source countries, this study examines the external and internal factors driving these remittance flows during the period 2001-2011. We estimate a gravity model for bilateral remittance flows using a variety of panel data techniques suitable to control for unobserved heterogeneity as well as simultaneous bias existing between remittances and migrant's stock. The main novelty with respect to the existing literature is the use of transaction costs of remittances as a superior alternative to geographical distance to proxy for remittance costs. We find that several factors have a significant effect on remittances, such as improved economic conditions in the receiving country, Pakistani migrant's stock in the source country, and financial development and political stability in the recipient country. Geographical distance, economic conditions and the unemployment rate in the source countries, however, do not appear to play a substantial role. We also find that geographical distance seems to be a poor proxy for the cost of remitting. This can be better understood in terms of migrant networks and improvements in receiving and source country financial services. While the effect of transaction costs of remittances' on remittance flows is found to be negative, its significance is not robust to changes in the specification of the estimated models.

Suggested Citation

  • Ahmed, Junaid & Martinez-Zarzoso, Inmaculada, 2014. "What drives bilateral remittances to Pakistan? A gravity model approach," Center for European, Governance and Economic Development Research Discussion Papers 209, University of Goettingen, Department of Economics.
  • Handle: RePEc:zbw:cegedp:209
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    More about this item

    Keywords

    remittances; gravity model; stock of migrant; geographical distance; transaction cost; financial development; political stability; Pakistan;

    JEL classification:

    • F22 - International Economics - - International Factor Movements and International Business - - - International Migration
    • F30 - International Economics - - International Finance - - - General
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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