How important are remittances to savings? Evidence from the Latin America and the Caribbean Countries
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Date
2022
Journal Title
Journal ISSN
Volume Title
Publisher
IZA Journal of Development and Migration
Abstract
This paper investigates the direct and the indirect roles of migrant transfers in the saving
behaviors of the Latin America and Caribbean (LAC) countries during the period 1997–2018.
Using the autoregressive distributed lag (ARDL) panel estimation technique, the results based
on the Pooled Mean Group approach provide strong evidence of the importance of inward
remittances to savings. On average, an increase in inward remittances by 1% leads to about
0.10% increase in savings ceteris paribus, but the effect is quantitatively larger in the short-run
than in the long-run, albeit more significant in the latter case. Quite outstanding here is the
observation of the detrimental role of remittances on savings in the long-run once governance
quality in aggregate and disaggregated forms are controlled for, suggesting possible adverse
effects of remittances for economic development in the long-run. Nevertheless, macroeco-
nomic stability as well as institutional quality, foreign direct investment (FDI), and foreign aid
were found to be important moderators of the remittances–savings linkage. For the latter two
variables, emphasis is on complementarity rather than substitutability between remittances,
aid, and FDI. While in the short-run remittances appear to perform better in enhancing sav-
ings in countries where an improvement in corruption control is visible, political rights and
civil liberties compliment migrant transfers in propelling savings in the long- and short-runs,
respectively. Moreover, remittances are found to play a major role in ameliorating the adverse
effects of the financial crisis on savings, just as they are observed to function as a lifeline to
savings in countries with increasing macroeconomic instability in form of inflation, in the
long-run. The findings are robust to the use of alternative estimation techniques. Policy recom-
mendations are suggested.
Description
Keywords
Remittances, Savings, Finance, Institutions, LAC
Citation
Nnyanzi, J. B., Kilimani, N., & Oryema, J. B. (2022). How important are remittances to savings? Evidence from the Latin America and the Caribbean Countries. IZA Journal of Development and Migration, 13(1). https://doi.org/10.2478/izajodm-2022-0007