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Barajas and Chami are affiliated with the International Monetary Fund, Fullenkamp and Montiel are affiliated with Duke University and Williams College, respectively, and Gapen is affiliated with Board of Governors of the Federal Reserve System. The views expressed are solely those of the authors and should not be reported as representing the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.
Another channel may be through fertility. Fargues (2007) finds strong positive and negative correlations between remittance receipts and fertility rates for Egypt and Morocco, respectively. But the author argues that remittances may simply be proxying for the transmission of social attitudes rather than having a causal impact on fertility. In addition, Cox and Stark (2005) argue that parents provide financial help to encourage the production of grandchildren through what the authors identify as the “subsidization effect”, or a child’s willingness to furnish parents with attention and care conditioned on prior parental example.
Chami, Gapen and Cosimano (2006), using a dynamic general equilibrium model with remittances, show that these flows reduce labor supply, thereby increasing the correlation between labor and output. Thus, higher remittances can lead to greater output volatility.
For example Kozelt and Alderman (1990) studied labor force participation and labor supply in Pakistan using data from the 1986 survey by the Pakistan Institute of Development Economics and found a significant negative impact of remittances on the labor force participation of males. Similarly, Itzigsohn (1995) also found, in a sample of Caribbean Basin cities, that remittances significantly reduce the labor force participation of household heads as well as other members of remittance-receiving families. For a discussion of the literature on the impact of remittances on labor supply, see http://programs.ssrc.org/intmigration/AnthologyT16/. The papers there point to a reduction in labor participation.
Aggarwal, Demirguc-Kunt, and Martínez Pería (2006) show that this is the case; using panel estimations over 99 developing countries for the 1975–2003 period, remittances are found to be associated with higher ratios of both banking deposits and credit to GDP.
Some studies refer to an alternative explanation for remittances, namely that they follow an investment or portfolio motive. In this case, endogeneity would also arise, but in the opposite direction. An improvement in domestic economic conditions, higher economic growth, for example, would be expected to encourage an increase in these profit-driven flows. Of course, the empirical evidence to date points overwhelmingly toward the altruistic and compensatory motive for remitting (see Chami, et al., 2008 for a survey of the theory and empirical evidence regarding the drivers of remittance flows).
The cross section was based on 101 countries with data averaged over 1970-2003.
The study used three measures to proxy for the level of financial deepening, all expressed as a ratio to GDP: M2, aggregate banking sector deposits, and aggregate bank credit to the private sector.
However, there could be an alternative interpretation of this result. On the one hand, there is a vast empirical literature supporting a link between financial deepening and economic growth, and on the other hand, as mentioned earlier, Aggarwal, et al. (2006) find a positive link between remittances and financial deepening. The negative coefficient on the interaction between financial deepening and remittances in growth regressions could be showing that increases in financial depth achieved through remittance flows are of lesser quality; although the financial sector is larger, it is not intermediating resources more efficiently, and therefore its positive effects on growth are attenuated.