This article investigates the relationship between remittance inflows and financial development in India from 1980 to 2018. The study employed Autoregressive Distributed Lag (ARDL) and Vector Error Correction (VEC) models to capture the short and long-run dynamics. In addition, the impulse response function (IRF) and forecast error variance decomposition (FEVD) analysis were utilised to understand the dynamic reaction of financial development to a given shock to remittance inflows and other variables. The results of the ARDL model reveal that remittances negatively influence financial development in the short run, while they positively influence it in the long run. The IRF analysis shows that financial development responds positively to one standard positive shock to remittance inflows. The FEVD analysis further reveals that shocks to remittance inflows explain around 30% to 32% of the total variation in financial development. From a policy standpoint, the findings suggest that well-framed policies should be formulated and implemented to encourage more remittance flows through formal channels. It will boost financial development, economic growth and also increase the other developmental effects of remittances on the economy.
AcostaP., CalderonC., FajnzylberP., & LopezH. (2008). What is the impact of international remittances on poverty and inequality in Latin America?World Development, 36(1), 89–114.
2.
AdamsR. H.Jr, & CuecuechaA. (2010). Remittances, household expenditure and investment in Guatemala. World Development, 38(11), 1626–1641.
3.
AdamsR. H.Jr, & PageJ. (2005). Do international migration and remittances reduce poverty in developing countries?World Development, 33(10), 1645–1669.
4.
AdamsR. H.Jr, & CuecuechaA. (2013). The impact of remittances on investment and poverty in Ghana. World Development, 50, 24–40.
5.
AdekunleI. A., TellaS. A., SubairK., & AdegboyegaS. B. (2020). Remittances and financial development in Africa. Journal of Public Affairs. https://doi.org/10.1002/pa.2545
6.
AggarwalR., Demirgüç-KuntA., & PeríaM. S. M. (2011). Do remittances promote financial development?Journal of Development Economics, 96(2), 255–264.
7.
AkçayS. (2020). Remittances and financial development in Bangladesh: Substitutes or complements?Applied Economics Letters, 27(14), 1206–1214.
8.
AkçayS., & KarabulutoğluE. (2021). Do remittances moderate financial development–informality nexus in North Africa?African Development Review, 33(1), 166–179.
9.
AnyanwuJ. C., & ErhijakporA. E. (2010). Do international remittances affect poverty in Africa?African Development Review, 22(1), 51–91.
10.
AskarovZ., & DoucouliagosH. (2020). A meta-analysis of the effects of remittances on household education expenditure. World Development, 129, 104860.
11.
AziziS. S. (2020). Impacts of remittances on financial development. Journal of Economic Studies, 47(3), 467–477.
12.
BaltagiB. H., DemetriadesP. O., & LawS. H. (2009). Financial development and openness: Evidence from panel data. Journal of Development Economics, 89(2), 285–296.
13.
BasnetH. C., KoiralaB., UpadhyayaK. P., & Donou-AdonsouF. (2020). Workers’ remittances and financial development: The case of South Asia. International Review of Economics, 68(2), 185–207.
14.
BettinG., & ZazzaroA. (2012). Remittances and financial development: Substitutes or complements in economic growth?Bulletin of Economic Research, 64(4), 509–536.
15.
BhattacharyaM., InekweJ., & ParamatiS. R. (2018). Remittances and financial development: empirical evidence from heterogeneous panel of countries. Applied Economics, 50(38), 4099–4112.
16.
BrownR. P. C., CarmignaniF., & FayadG. (2013). Migrants’ remittances and financial development: Macro and micro-level evidence of a perverse relationship. World Economy, 36(5), 636–660.
17.
CaoS., & KangS. J. (2020). Personal remittances and financial development for economic growth in economic transition countries. International Economic Journal, 34(3), 472–492.
18.
ChowdhuryM. B. (2011). Remittances flow and financial development in Bangladesh. Economic Modelling, 28(6), 2600–2608.
19.
CoulibalyD. (2015). Remittances and financial development in sub-Saharan African countries: A system approach. Economic Modelling, 45, 249–258.
20.
Demirgüç-KuntA., CórdovaE. L., PeríaM. S. M., & WoodruffC. (2011). Remittances and banking sector breadth and depth: Evidence from Mexico. Journal of Development Economics, 95(2), 229–241.
21.
DémurgerS., & WangX. (2016). Remittances and expenditure patterns of the left behinds in rural China. China Economic Review, 37, 177–190.
22.
DeonananR., RamkissoonB., RamkissoonD., & HoseinR. (2020). Disentangling the relationship between remittances and financial development: Evidence from Jamaica. International Review of Applied Economics, 34(2), 193–216.
23.
DickeyD. A., & FullerW. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366a), 427–431.
24.
Donou-AdonsouF., PradhanG., & BasnetH. C. (2020). Remittance inflows and financial development: Evidence from the top recipient countries in sub-Saharan Africa. Applied Economics, 52(53), 5807–5820.
25.
EggohJ., BangakeC., & SemedoG. (2019). Do remittances spur economic growth? Evidence from developing countries. The Journal of International Trade & Economic Development, 28(4), 391–418.
26.
FromentinV. (2017). The long-run and short-run impacts of remittances on financial development in developing countries. Quarterly Review of Economics and Finance, 66, 192–201.
27.
FromentinV. (2018). Remittances and financial development in Latin America and the Caribbean countries: A dynamic approach. Review of Development Economics, 22(2), 808–826.
28.
GiulianoP., & Ruiz-ArranzM. (2009). Remittances, financial development, and growth. Journal of Development Economics, 90(1), 144–152.
29.
GuptaS., PattilloC. A., & WaghS. (2009). Effect of Remittances on Poverty and Financial Development in Sub-Saharan Africa. World Development, 37(1), 104–115.
30.
ImaiK. S., GaihaR., AliA., & KaickerN. (2014). Remittances, growth and poverty: New evidence from Asian countries. Journal of Policy Modeling, 36(3), 524–538.
31.
JohansenS., & JuseliusK. (1990). Maximum likelihood estimation and inference on cointegration—with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), 169–210.
32.
KakhkharovJ., & RohdeN. (2020). Remittances and financial development in transition economies. Empirical Economics, 59(2), 731–763.
33.
KarikariN. K., MensahS., & HarveyS. K. (2016). Do remittances promote financial development in Africa?Springer Plus, 5(1).
34.
Karki NepalA. (2016). The impact of international remittances on child outcomes and household expenditures in Nepal. The Journal of Development Studies, 52(6), 838–853.
35.
KratouH., & GazdarK. (2015). Addressing the effect of workers’ remittance on economic growth: evidence from MENA countries. International Journal of Social Economics, 43(1), 51–70.
36.
LoayzaN. V., & RaddatzC. (2007). The structural determinants of external vulnerability. The World Bank Economic Review, 21(3), 359–387.
37.
MahapatroS., BaileyA., JamesK. S., & HutterI. (2017). Remittances and household expenditure patterns in India and selected states. Migration and Development, 6(1), 83–101.
38.
MasronT. A., & SubramaniamY. (2018). Remittance and poverty in developing countries. International Journal of Development Issues, 17(3), 305–325.
39.
MisatiR. N., KamauA., & NassirH. (2019). Do migrant remittances matter for financial development in Kenya?Financial Innovation, 5(1), 1–25.
40.
MishkinF. S. (2009). Globalization and financial development. Journal of Development Economics, 89(2), 164–169.
41.
NwaoguU. G., & RyanM. J. (2015). FDI, foreign aid, remittance and economic growth in developing countries. Review of Development Economics, 19(1), 100–115.
42.
NyamongoE. M., MisatiR. N., KipyegonL., & NdiranguL. (2012). Remittances, financial development and economic growth in Africa. Journal of Economics and Business, 64(3), 240–260.
43.
PandikasalaJ., VyasI., & ManiN. (2020). Do financial development drive remittances? Empirical evidence from India. Journal of Public Affairs. http://dx.doi.org/10.1002/pa.2269
44.
PatrickH. T. (1966). Financial development and economic growth in underdeveloped countries. Economic Development and Cultural Change, 14(2), 174–189.
45.
PesaranM. H., ShinY., & SmithR. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326.
46.
PhillipsP. C., & HansenB. E. (1990). Statistical inference in instrumental variables regression with I (1) processes. The Review of Economic Studies, 57(1), 99–125.
47.
PhillipsP. C., & PerronP. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335–346.
48.
RajanR. G., & ZingalesL. (2003). The great reversals: The politics of financial development in the twentieth century. Journal of Financial Economics, 69(1), 5–50.
49.
SahooM., & SethiN. (2020a). Does remittance inflow promote human development in Sub-Saharan Africa? An empirical insight. Global Economy Journal, 20(4), 1–23.
50.
SahooM., & SethiN. (2020b). Does remittance inflow stimulate electricity consumption in India? An empirical insight. South Asian Journal of Business Studies. http://dx.doi.org/10.1108/SAJBS-05-2020-0158
51.
SahooM., SucharitaS., & SethiN. (2020). Does remittance inflow influence human development in south Asian countries? An empirical insight. Business Strategy & Development, 3(4), 578–589.
52.
SalahuddinM., & GowJ. (2015). The relationship between economic growth and remittances in the presence of cross-sectional dependence. The Journal of Developing Areas, 49(1), 207–221.
53.
SchumpeterJ. A. (1934). The theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle. Transaction Publishers.
54.
StockJ. H., & WatsonM. W. (1993). A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica: Journal of the Econometric Society, 61(4), 783–820.
55.
SvirydzenkaK. (2016). Introducing a new broad-based index of financial development(Working Paper No. 2016/005). International Monetary Fund.
56.
TornellA., WestermannF., & MartinezL. (2004). The positive link between financial liberalization, growth and crises(Working Paper No. w10293). National Bureau of Economic Research.
57.
UddinG. S., & SjöB. (2013). Remittances, financial development and economic growth in Bangladesh. South Asia Economic Journal, 14(2), 261–273.
58.
World Bank. (2021). Resilience: COVID-19 crisis through a migration lens (Migration and Development Brief 34).
59.
ZivotE., & AndrewsD. W. (1992). Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. Journal of Business & Economic Statistics, 10(3).
