Using a cross-country of data series covering about 73 developing countries between 1975 and 2002, the authors investigate the interaction between remittances and financial development and its impact on growth. The analysis emphasizes how a country’s capacity to use remittances may be influenced by local financial sector conditions. The empirical findings suggest that remittances can promote growth in less financially developed countries. A one percentage point increase in remittances as a share of GDP is associated with a 0.2 percentage points, controlling for the level of financial development. The authors conclude that in countries with less-developed financial systems, remittances act as a de facto substitute for financial services, providing households with credit and insurance and increasing investment opportunities, leading to higher growth. The analysis accounts for the endogeneity of remittances and financial development using a Generalized Method of Moments (GMM) approach, and is robust to various measures of financial sector development used, and is robust to a number of sensitivity tests.

Publication Details

Remittances, Financial Development and Growth
Giuliano, Paola
International Monetary Fund
Publish Date
Giuliano, Paola, Remittances, Financial Development and Growth (International Monetary Fund, 2005).