Do remittances condition the relationship between trade and government consumption?

ABSTRACT

This paper used a panel model and 99 developing economies over the 1980–2018 period to investigate the effect that remittances had on the relationship between trade and government consumption. We showed that remittances mediate the relationship between trade and government consumption. We documented that in high remittance recipient countries, trade negatively affected government consumption. In low remittance recipient countries, by contrast, we found that trade positively affected government consumption. Our results suggested that remittances can reduce the fiscal cost on government budget associated with adverse trade shocks. We proposed two policy responses for remittance recipient countries.

KEYWORDS:

• Remittances
• government consumption
• trade exposure
• system-GMM

JEL Classification:

• F22
• H53

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ We use government consumption and government spending synonymously.

² Breusch-Pagan/Cook-Weisberg test reveals evidence of heteroscedasticity in the data.

³ Short run: (0.066+(−0.015 × 6.5))×10 = −0.315; long run: −0.315/(1–0.543) = −0.689.

⁴ To save space, control variables are not reported, but they are qualitatively similar to Table 1.