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Do Financial and Institutional Variables Enhance the Impact of Remittances on Economic Growth in Latin America and the Caribbean? A Panel Cointegration Analysis

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Abstract

Using recently developed panel unit root and panel cointegration tests and the Fully-Modified OLS methodology (FMOLS), this paper estimates the impact of remittances on the economic growth of selected upper and lower income Latin American & Caribbean (LAC) countries over the 1990–2007 period. Despite the large flow of remittances to the region, there have been relatively few empirical studies assessing the impact of remittances on economic growth in LAC. Panel unit root tests suggest that several of the macro variables included in the model exhibit unit roots, yet, at the same time, Pedroni’s panel cointegration test determined that there is a cointegrating relationship among the variables in the estimated model. The FMOLS estimates suggest that remittances have a positive and significant effect on economic growth in both groups of countries. The estimates also indicate that both the degree of economic freedom and credit provided by the banking system have a positive and significant effect on economic growth in upper (middle) income LAC countries. The sign of the interaction term between remittances and the credit (and EFI) variables suggest that remittances act as substitutes for these variables. Finally, the effect of remittances on both sets of countries is stronger in the presence of a financial (credit) variable.

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Notes

  1. Ellerman (2003) reports that Mexican migrant associations send home between US $5000 and $25, 000 per year, while migrant associations from El Salvador send home donations of about US $ 10,000 per year. See also Solimano (2003) and Orozco (2004).

  2. The 23 countries in the sample are: Argentina, Belize, Bolivia, Brazil, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, St. Lucia, St. Vincent and Grenadines, Trinidad and Tobago, Venezuela, RB.

  3. The two countries for which remittances data was missing for the year 1990 are Guyana and Nicaragua. The missing data were generated via linear extrapolation.

  4. It is important to not confuse economic freedom with political and civil liberties. Countries may confer upon their citizens a substantial amount of political and civil liberty in the form of fair and competitive elections and freedom of the press, but still pursue policies that are inimical to economic freedom such as high levels if taxation and excessive government intervention and regulation.

  5. This study also estimated Eq. (2) with an interaction term between remittances and the EFI variable to determine whether these variables were complements or substitutes.

  6. The panel unit root and panel cointegration estimations were undertaken via EVIEWS7.1 software, while the FMOLS estimations were performed with the RATS6.01 software.

  7. Two upper middle income Caribbean (St. Lucia and St. Vincent and the Grenadines) countries had to be removed from the estimation because the Fraser Institute did not report EFI indexes for them.

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Acknowledgments

The author acknowledges the useful comments of reviewers of a previous version of this manuscript.

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  1. Department of Economics, Trinity College, Hartford, CT, USA

    Miguel D. Ramirez

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  1. Miguel D. Ramirez
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Correspondence to Miguel D. Ramirez.

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Ramirez, M.D. Do Financial and Institutional Variables Enhance the Impact of Remittances on Economic Growth in Latin America and the Caribbean? A Panel Cointegration Analysis. Int Adv Econ Res 19, 273–288 (2013). https://doi.org/10.1007/s11294-013-9407-2

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