Consumption Response to Diaspora Remittances in Zimbabwe

Abstract

This paper explores the impact of remittances on private consumption in Zimbabwe for the period 1980 to 2007. An augmented Keynesian consumption function which incorporates income, remittances, exchange rate, taxation, inflation and an economic and political instability dummy variable is postulated for this purpose. We also postulate a remittance equation with consumption, income, financial deepening, inflation, trade openness and an economic and political instability dummy variable as explanatory variables. In order to deal with the possible existence of the endogeneity problem between consumption and remittances, a Three Stage Least Squares method is used to estimate a simultaneous equation model with endogenous variables. The results indicate that diaspora remittances play a crucial role in determining private consumption in Zimbabwe. Hence, the results confirm the notion that diaspora remittances are mainly consumed, thus improving the living standards of many Zimbabweans. The paper therefore recommends that Zimbabwe can close the consumption gap through policies that promote the inflows of remittances.

Keywords: Consumption, Remittances, Endogeneity

BOJE: Botswana Journal of Economics, 11(15), 32-41