An Empirical Study on the Relationship of Financial Sector Development, Remittances Inflows, and Income Inequality in South Asian Countries

Abstract

The study explores the moderating role of financial sector development in the remittances-income inequality nexus in the six highest remittances-recipient “South-Asian economies”, “namely “Afghanistan, Bangladesh, India, Nepal, Sri Lanka, and Pakistan”” for the period 2006 to 2019. The direct channel of remittances-income inequality and the financial sector development & income-inequality have been greatly explored in the literature, but the indirect channel, i.e. the moderating role of the financial sector in the remittances- income inequality nexus, is still lacking; this study tries to fill this literature gap. The study explores the indirect link of the financial sector based on financial access, financial stability, financial depth, and financial efficiency in remittances-income inequality nexus in highest remittances-recipient South-Asian economies. The study applied Fixed effects and Pooled Ordinary Least Squares (POLS) econometric techniques in order to examine the role of financial sector development in the relationship between international remittances and income inequality. The empirical findings of the study show that the financial sector development mitigates the income-inequality effects in the selected remittance-recipient South-Asian economies. The interaction term of financial sector development and remittances mitigate the negative influence of income inequality in the selected economies. Remittances abridge income inequality in the presence of a well-functioning and sound financial sector in the selected South-Asian remittance-recipient economies.