Remittances and financial openness

Migrant remittances increased strongly since the 1980s, becoming an important and reliable source of funds for many developing countries. Therefore, there is a strong incentive for receiving countries to attract more remittances, especially through formal channels that turn out to be either less expensive and/or less risky than informal ones. One way of doing so is to increase their country's financial openness, but this policy option might also generate additional costs in terms of macroeconomic volatility. In this paper we investigate the link between remittance receipts and financial openness. We statistically test for the existence of such a relationship with a sample of 66 mostly developing countries from 1980–2005. Empirically we use a dynamic generalized ordered logit model to deal with the categorical nature of financial openness policy. We apply a two-step method akin to two stage least squares to deal with the endogeneity of remittances and potential measurement errors. We find a strong positive statistical and economic effect of remittances on financial openness.

► We study the relationship between financial liberalization and remittances. ► Financial liberalization reduces costs of remitting and boosts remittances. ► We use dynamic generalized order Logit model allowing for reverse causality.► Countries facing good conditions tend to open more their financial borders. ► The gains are balanced against costs in terms of additional volatility.