A gravity model of remittance determinants: evidence from Latin America and the Caribbean

Abstract

Given the importance of remittances it is crucial for the governments and the financial sectors in the region to recognize the specificity of each kind of remittance. A systematic analysis of the determinants of remittances would provide invaluable insights to policy makers and contribute to the design of more appropriate regulations. This in turn can promote an effective strategy for the mobilisation of remittances. In this paper the macroeconomic determinants of remittances are estimated for a set of Latin American and Caribbean countries. Generally two approaches to modelling the determinants of remittances have been undertaken in the empirical literature. First a microeconomic approach utilising household survey data (DE LA BRIÈRE, 2002; AMUENDO-DORANTES and POZO;YANG, 2008). Second a macroeconomic approach which uses balance of payments data (VARGAS-SILVA and HUANG, 2006; ADAMS, 3 2009). A third approach which combines a microeconomic foundation with macroeconomic data has been gaining some momentum (RAPOPORT and DOCQUIER, 2005; SCHIOPU and SIEGFRIED, 2006). It is this latter approach upon which the current study is based.A panel data set of bilateral remittance flows from 18 industrialised remittance sending countries 3 to 27 remittance receiving Latin American and Caribbean (LAC) countries 4 over the period 1998 to 2007 is utilised to study the determinants of remittances. This paper makes several contributions to the literature on remittances.Generally research on remittances in the LAC region is concentrated on a single country or a minority of countries (SAYAN et al., 2010;VARGAS-SILVA and HUANG, 2006; CASTILLO-PONCE et al, 2011). A number of studies have used bilateral data to study remittances (LUETH and RUIZ-ARRANZ, 2008;FRANKEL, 2011; DOCQUIER et al, 2012). These studies feature selected Latin American countries as part of a larger data set that focuses on developing countries in general. In this study a new measure of bilateral remittances is proposed, one that is based on the assumption that aggregate remittance inflows for a country are directly linked to the pattern of a migrating population. This makes it possible to derive bilateral estimates of remittances for a larger group of countries in the LAC region than has been available previously.Second, the effect on remittances is examined for a comprehensive set of economic, demographic and risk related factors (both man-made and natural). This is unlike earlier studies which tend to ignore the potential effects of demographic and/or risk related factors that may be important in capturing altruistic and investment motivations (VARGAS-SILVA and HUANG, 2006; LIN, 2011). Finally, microeconomic 4 theory provides the foundation for exploring the motives for remittances, which are then captured in a model comprising macroeconomic variables. Previous macroeconomic studies of remittances tend to utilise a reduced form equation for remittance with little or no reference to the underlying microeconomic foundations (HIGGINS et al, 2009;FONCHAMYO,...

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