Remittances and Growth in Latin America: A Panel Unit Root and Panel Cointegration Analysis

Abstract

Using recently developed panel unit root and panel cointegration tests and the Fully-Modified OLS (FMOLS) methodology, this paper estimates the impact of remittances on the economic growth of selected upper and lower income Latin American & Caribbean countries. Despite a large flow of remittances to the region, there have been relatively few empirical studies assessing the impact of remittances on growth in Latin American and the Caribbean. Panel unit root tests suggests that several of the macro variables included in the model exhibit unit roots, yet, at the same time, Pedroni's panel cointegration methodology determined that there is a cointegrating relationship among the variables in the estimated model. Moreover, FMOLS estimates suggest that remittances have a positive and significant effect on economic growth in both groups of countries. The interaction of remittances with a financial development variable revealed that these two variables act as substitutes and, moreover, that the impact of remittances is more pronounced in the presence of the financial development variable.

Keywords: Economic growth, Foreign Direct Investment (FDI), Fully Modified Ordinary Least Squares (FMOLS), Latin America & Caribbean, Pedroni's panel cointegration methodology, Panel unit root tests, Pooled regression, Remittances

JEL Classification: C22, C23, F40, O10, O50