Is there an Investment Motive behind Remittances? Evidence from Panel Cointegration

This paper re-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 causes more remittances, suggesting that remittances are not only driven by altruistic motives but also investment motives. An important policy implication emanating from this study is that developing countries should improve the effectiveness of remittance inflows given that these can augment the rate of capital accumulation.