Do Migrant Remittances Complement Domestic Investment? New Evidence from Panel Cointegration

This paper examines whether migrant remittances “crowd in” or “crowd out” domestic investment in developing countries. Using recently developed panel cointegration techniques that account for cross-sectional dependence, structural breaks and regime shifts, the paper shows that remittances form a long-run equilibrium relation with domestic investment. The results of the panel vector error correction model reveal the absence of a short-run relationship but the presence of a long-run bidirectional link between remittances and investment. Thus, remittances drive investment while investment itself cause more remittances, suggesting that remittances are not only driven by altruistic motives but also investment motives.