The Family Channel: Migrant Remittances and Government Finance

Abstract:     
This paper argues that migrant remittances can ease government access to capital, generate tax revenue through household consumption, and ultimately allow governments to expand their size. The paper offers three empirical tests. First, using data for 76 developing countries from 1980 to 2007, I find that remittance inflows are associated with greater total government expenditures, whereas other forms of economic integration - especially trade - reflect the conventional view of the constraining influence of global markets. I then explore the possible causal mechanisms behind these results. In the second analysis, I find that remittances are associated with greater tax revenue due to the link between remittances, household consumption, and consumption taxes. These results are robust to using an instrumental variable approach based on exogenous variation in the wealth of migrant host countries. The third test explores the determinants of sovereign borrowing costs in emerging markets and finds that remittances are associated with lower sovereign spreads. The results suggest that private household financial flows can provide financial resources and ease access to credit to governments in developing countries.

Number of Pages in PDF File: 41

Keywords: Migrant remittances, sovereign borrowing, taxation, government spending, developing countries, political economy

JEL Classification: F22, F34, H20, H50

working papers series