The Mediating Role of Financial Development in the Remittances and Household Consumption Nexus: Evidence from a Panel of African and Asian Countries

Abstract

This paper examines whether the strength of the relationship between remittances and household consumption, documented in the empirical literature, varies with the financial deepening. It uses a nonlinear panel model and the pooled mean group estimator for a sample of 19 countries over the period 1987 to 2013. The results show that households in financially developed countries gain significantly from remittances. They also indicate that per capita income is positively related to household consumption while inflation and urbanization are negatively related to it. These findings suggest that financial development should be enhanced not only to favor the inflows of remittances to developing countries but also to effectively channel remittances to productive activities and credit opportunities that can significantly improve household consumption.