Abstract
Using recently developed panel unit root and panel cointegration tests and the Fully-Modified OLS methodology, this paper estimates the impact of remittances on the economic growth of selected upper and lower income Latin American & Caribbean (LAC) countries over the 1990-2007 period. Despite the large flow of remittances to the region, there have been relatively few empirical studies assessing the impact of remittances on economic growth in LAC. Panel unit root tests suggest that several of the macro variables included in the model exhibit unit roots, yet, at the same time, Pedroni’s panel cointegration methodology determined that there is a cointegrating relationship among the variables in the estimated model. The FMOLS estimates suggest that remittances have a positive and significant effect on economic growth in both groups of countries. The estimates also suggest that institutional and credit variables have a positive and statistically significant effect on economic growth in upper income LAC countries, yet the interaction of these variables with remittances indicates that these variables act as substitutes. Finally, the effect of remittances on both sets of countries is more evident in the presence of a financial variable.
JEL Codes: C22, O10, O40, O57.
Keywords: Credit, Economic Freedom Index (EFI), FMOLS, Latin America & Caribbean, Remittances and Growth, Panel Cointegration, Panel Unit Roots