Macroeconomic Uncertainty, Remittance Inflows And Economic Growth: Evidence From South Asia
Author: Muhammad Imran

Remittance inflows can affect economic growth contributing both at household and macro level. Conversely, increasing remittance inflows may cause appreciation of exchange rate (Dutch Disease) which may adversely affect economic growth through hurting exports and international competitiveness. The broader objective of this study is to explore the impact of increasing remittance inflows on economic growth. The study also proposes that exchange rate uncertainty affects remittance inflows and that the uncertainty-remittances and growth relationship may be sensitive to risk and uncertainty measures (standard deviation and GARCH generated conditional variance respectively). Against this backdrop this study examined the impact of remittance inflows on economic growth for a panel of South Asian countries (India, Pakistan, and Sri Lanka). The time period covered is 1980-2011. NeoClassical production function is extended from a single equation Simultaneous Equation Model (SEM) comprising three equations to capture the simultaneous feedback of the dependent variables (remittances, exchange rate and economic growth). Further, to overcome endogeniety arising from correlation between lagged explanatory variables and error terms, instrumental variable (IV) approach is followed and Generalized Method of Moment s (GMM) estimation technique is used. The study finds that remittance inflows do not enhance economic growth for South Asia and the positive impact of remittance inflows on growth is conditional upon the use of these inflows to develop human capital and the level of financial development respectively as positive interaction terms between remittances and human capital and remittances and financial development are found. Uncertainty-remittances-growth nexus remains same across alternative measures of uncertainty indicating that people make no differentiation between risk and uncertainty theoretically. Furthermore, the Dutch Disease effect holds for South Asia which may undo the positives of remittances for the region. Government expenditures, trade openness, FDI and physical capital are significant determinant of economic growth. Nonetheless FDI, trade openness, terms of trade and increased money supply also cause appreciation of exchange rate. The study recommends that for effective use of remittance inflows, governments, through collaborating with financial institutions should ease the process of sending and receiving remittances through banking sector. Also for long term benefits, remittance inflows should be invested in education to develop human capital. Supervisor:- Dr. Sajid Amin Javed

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Keywords : Economic Growth, Macroeconomic Uncertainty, Remittance Inflows, South Asia
Supervisor: Sajid Amin Javed

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