The contribution of remittances to growth : A dynamic approach and empirical analysis

Purpose – The aim of this paper is to investigate the impact of exogenous shocks of remittances on consumption, investment, imports and output in five Mediterranean countries. Design/methodology/approach – This paper builds a Keynesian type econometric model with a dynamic perspective and a sound theoretical basis. The model is used for estimating short and long‐run multipliers of remittances, through which the impact of remittances on growth and other key macroeconomic variables is estimated. Findings – The analysis reveals a uniform country performance of instability and uncertainty, with great temporal and inter‐country fluctuations of remittance effects. The findings point to different inter‐country priorities of remittance spending and to an asymmetric impact of remittance changes, in the sense that the good done to growth by rising remittances is not as great as the harm done by falling remittances. Research limitations/implications – In this paper the purpose is to examine the demand side impact of remittances and uses remittances as an exogenous variable in the model. A more comprehensive approach would probably be to consider jointly supply side elements and handle remittances as an endogenous variable to estimate feedbacks. Practical implications – The impacting shock of an increase or a drop of remittances is found not to be instantaneous, but is distributed over time smoothing out its effects on growth. This gives time for relevant policies to be adopted in case of emergencies in the remittance flows. The findings show that economies are weakly sheltered against the damaging impact of falling remittances. Consequently, countries with high remittances should be seriously taking them into consideration as a major pillar in planning a strategy for an overall development. Policy makers may carefully consider remittance induced imports, not necessarily to reduce them and turn them to domestic production, which may be inflationary, but to reshuffle them towards imports of investment goods. Originality/value – The value of this paper and its novelty is first, its methodological approach to build a new econometric model, based on a sound theoretical basis, for estimating the dynamic impact of remittances simultaneously on key macroeconomic variables; and second, the capability of the model to pinpoint similarities and divergences of remittance effects across countries and over time.