Causal Linkage between Remittances and Financial Development: Evidence from the BRICS (Brazil, Russia, India, China, and South Africa)

Abstract

The steady flow of remittances due to financial integration has grabbed the attention of academicians and policy advisors. Despite the growing importance of remittances, the study on the relationship between remittances and financial development in Brazil, Russia, India, China, and South Africa remains unexplored. Thus, this paper analyses the effect of remittances on financial development. It also investigates the long-run and short-run relationship between remittances and financial development using annual data of Brazil, Russia, India, China, and South Africa from 1990 to 2019. Three different financial development indicators are used: domestic credit to the private sector as a percentage of GDP, bank deposit as a percentage of GDP, liquid liabilities as a percentage of GDP. The study employs the fixed and random effect model, Johansen Cointegration tests, vector error correction model, and Wald tests for analysis. The results suggest a positive effect of remittances on bank deposits. It indicates that a 1% increase in remittances leads to a 4.5% increase in bank deposits. The study also reveals the long-run relationship between remittances and bank deposits and the absence of a short-run relationship between remittances and financial development. The main implications of the study can be predicted as remittances allow the accumulation of savings in the long run and provide the platform for the unbanked recipients to utilize certain financial products and services. The absence of a short-run relationship indicates that remittances are utilized mainly for consumption in the short run. However, it can be recommended that BRICS economies should make every effort to increase the remittance inflows through reduced transaction costs and tax benefits in remittance-led investment or banks to bank deposits with competitive deposit rates for the diaspora.

Keywords:

• Remittances
• financial development
• BRICS
• fixed effect model
• random effect model
• Johansen cointegration approach
• vector error correction model