Remittances and Economic Growth: Analysis of the Direct and Indirect Effects

As remittances inflows have increased steadily in the recent years, researchers and policy makers have analyzed more and more the impact those flows have on economic development. However, the literature has not reached a consensus on whether remittances where beneficial or not for economic growth. This paper investigates the direct and indirect effects of remittances on economic growth using a dataset of 129 countries between 1980 and 2014. The potential stabilizing role of remittances on output volatility will be analyzed as well. I extended the Augmented Solow Model developed by Mankiw, Romer and Weil (1992) with remittances to highlight two main growth channels: human and physical capital accumulation. Results showed that remittances had a direct positive impact on economic growth which was enhanced where physical and human capital accumulation levels were low. Furthermore, remittances are not used as a way to smooth consumption. Results therefore show that households use remittances to save and invest in education and that those flows are a source of capital for development.