Remittances and Output Volatility: The Role of Financial Development

Abstract

This paper examines the impact of remittances on output volatility through the channel of financial development using data for 158 countries from 1971 to 2017. We estimate the role of financial development by looking at multiple features of financial institutions, such as depth, access and efficiency. We used multiple indicators as a proxy of financial development in the remittance-output volatility nexus and employed System Generalized Method of Moments (GMM) and Fixed Effects Instrumental Variable (FE IV) models. Our findings are robust across specifications. We find a significant positive impact of all indicators of financial development on the remittance-output volatility relationship. The findings suggest that multifaceted financial development is needed for the effective management of output volatility through remittance inflows.