Analyzing the differential impacts of financial sector development on remittance inflows

This study investigates the financial development and remittances nexus using a panel of 84 countries at all levels of income over the 1995 to 2018 period. We employ a dynamic commonly correlated effects estimator (DCCE) for a heterogeneous panel data model with weakly exogenous regressors to investigate the impact of financial development on remittances using indices that cover all aspects of the financial sector development (overall, institutional, and markets). The results indicate the importance of the development of the financial sector for remittance inflows, regardless of the motives. Our findings generally support the notion that improving the financial sector positively influences the magnitude of remittances for lower-income countries but not high-income countries. To attract more remittances, policymakers of low-income countries may implement policies that improve the development of the financial sector.