Remittances-financial development nexus: Causal evidence from four African countries

Abstract

The bulk of existing studies investigating the relationship between remittances inflows and financial development focus on the effect of the former on latter neglecting the feedback impact. Unlike these studies, this work adopts a robust composite measure of financial development using the World Bank four mainstays to investigate the direction of the causal relationship between remittances and financial development between 1999 and 2017. Adopting four most developed financial sectors across the four regions of Africa, this study documents causal evidence from homogeneous and heterogeneous models. Our results established both causal directions in heterogeneous models among African most developed financial sectors. Thus, remittances inflows have spurred financial development and vice versa. However, the direction of the causal relationship only flows from financial development to remittances in the homogeneous setting. It is, therefore, recommended that these countries should develop their financial sectors to attract higher remittances. Also, policymakers are advised to explore remittances inflows, as a policy option, to develop their financial sectors.