Remittances and domestic investment nexus: Evidence from a PMG-ARDL approach

Abstract

This paper examines the nexus between domestic investment and remittances in developing economies, with a particular focus on countries in Africa. The panel Auto Regressive Distributed Lags and the Dumitrescu-Hurlin causality testing techniques covering the period from 2000-2021 for 30 African countries were employed to examine the remittance-domestic investment nexus. The findings of the study suggest that there are long-run relationships and a very strong joint causality between domestic investment and remittances for the panel of countries in this study. Furthermore, the findings of the causality test suggested a bi-directional causality between domestic investment and remittances. Remittances have been a key link between migration and development in low- and middle-income countries (LMICs), both at the household and country levels. Remittance receipts play an integral part in facilitating consumption smoothing and serving as a vital source of cash for domestic investment in LMICs. The United Nations Sustainable Development Goals acknowledge the importance of remittances, such that in some states, more than 10 percent of the respective countries gross domestic product is from remittance receipts. The results denote that policies aimed at increasing domestic investment through remittances need to be cautiously planned to ensure prolonged effects. Since there is a bi-directional causality between domestic investment and remittances, policymakers need to understand the macroeconomic implications of remittance inflows for domestic investment. In a nutshell, policies can be designed to harness and maximize the benefits that recipient countries can derive from remittance flows to drive domestic investment.