An Empirical Analysis on Remittances and Financial Development in Latin American Countries

TL;DR

This study empirically examines the positive relationship between remittance flows and financial development in four Latin American lower-middle-income countries from 1996 to 2019, highlighting policy implications.

Contribution

It provides new empirical evidence on the association between remittances and financial development in Latin America using panel data analysis.

Findings

Remittances positively correlate with financial development.

Foreign direct investment and inflation are positively associated with financial development.

Trade openness negatively impacts financial development.

Abstract

Remittances have become one of the driving forces of development for countries all over the world, especially in lower-middle-income nations. This paper empirically investigates the association between remittance flows and financial development in 4 lower-middle-income countries of Latin America. By using a panel data set from 1996 to 2019, the study revealed that remittances and financial development are positively associated in these countries. The study also discovered that foreign direct investment and inflation were positively correlated with financial development while trade openness had a negative association with financial development. Therefore, policymakers of these countries should implement and formulate such policies so that migrant workers would have the incentives to send money through formal channels, which will augment the effect of remittances on the recipient country.