Remittances, Monetary Policy and Financial Development in Developing Countries
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Date
2018-03
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University of Ghana
Abstract
The thesis examines the interrelationships among remittances, monetary policy and financial market development in developing countries. It focuses on how remittances and monetary policy can be harnessed to propel financial development in developing countries. It employs standard research methodologies and a combination of advanced econometric procedures, including, but not limited to, panel vector auto regression, structural Bayesian vector autoregression (SBVAR), impulse response functions and two stage least squares to elicit the following robust results. First, remittance and its volatility reduce monetary policy risk and interest rates. This is largely due to the stable and countercyclical nature of remittance inflows. Second, the macroeconomic stabilising effects of remittances is higher for countries with developed financial systems. Third, for remittances to exert a positive effect on financial development, a conducive monetary policy environment which ensures price stability while curtailing price distortions is a prerequisite. Fourth, remittances promote stock market development in remittance dependent countries while promoting banking sector development in remittance ‘starved’ countries. Fifth, countries with weak institutions will ‘import’ growth in the form of international remittances, to make up for any loss in growth arising from the ‘bad’ institutions.
The thesis makes a number of contributions to the existing body of knowledge. Empirically, it is the first to investigate the effect of remittances and its volatility on monetary policy rate and monetary policy volatility. Further, the thesis sets itself apart from the prevailing literature by considering remittances, stock market development and banking sector development simultaneously in the same modelling framework. This enables a wider view of the relationships and avoids the problem of omitted variable bias and consequent misinterpretation of results. Another novel contribution is the assessment of the interactive effect of monetary policy and remittances on financial development. This is new in the literature.
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Methodologically, the thesis contributes by constructing financial development measures that capture the depth, efficiency, access and stability dimensions of the financial system. The application of SBVAR methodology to the remittance-monetary policy-financial development nexus is an innovation in the literature. Theoretically, the thesis advances knowledge in the application of the Mundell-Fleming Dornbusch model by using it to simulate the effect of monetary contraction on remittance inflows. It has also laid some foundation for the development of theories linking remittances and governance institutions to economic growth.
The thesis offers some recommendations to guide policy formulation. Given that remittances promote macroeconomic stability, remittance-stimulating policies must be adopted by developing country governments. Such policies may entail, reducing the cost of remitting, lowering the cost of recruiting migrants and encouraging the channelling of remittances through formal channels. Again, a favourable monetary environment which ensures stable inflation and removes price distortions must be put in place by home country monetary authorities, if they must optimise the increasing remittances inflows to foster financial development. Lastly, domestic absorptive capacity in the form of rule of law, effective governance, voice and accountability, regulatory quality, control of corruption, and political stability must be built to enable developing countries to effectively leverage remittances to promote growth.
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Keywords
Mundell-Fleming Dornbusch model, macroeconomic, accountability, regulatory quality, financial system, SBVAR methodology, interrelationships, remittances, monetary policy, financial market, developing countries