The inter-temporal relationship between workers' remittances and consumption expenditure in Sri Lanka

Purpose The objective of this study is to examine the inter-temporal relationship between workers' remittances and consumption expenditure in Sri Lanka over the period of 1975-2017 using the annual time series data. Design/methodology/approach To test the order of integration of the variables used in this study, the augmented Dickey-Fuller (ADF) and Phillips and Perron (PP) unit root tests were employed. The autoregressive distributed lag (ARDL) bounds cointegration technique was used to examine the long-run relationship between the variables. The Granger causality test was used to examine the causal relationship between the variables. Findings The unit root tests confirm that the variables are stationary at 1st differenceI(1). Meanwhile, the ARDL test results show that workers' remittances have a positive long-run relationship with consumption expenditure in Sri Lanka. The coefficient of the error correction term indicates that 9.3% of disequilibrium error is adjusted each year and the response variable of the consumption expenditure moves towards the long-run equilibrium path. Further, the results of the Granger causality test indicate that workers' remittances Granger cause consumption expenditure in the short-run. Practical implications The findings have some important policy implications for the design of efficient policy related to workers' remittances and consumption expenditure pattern, the knowledge of which will help promote the macroeconomic stability and welfare of people in Sri Lanka. Originality/value This study contributes to the existing literature by using newly developed ARDL bounds cointegration techniques to investigate the inter-temporal relationship between workers' remittances and consumption expenditure in Sri Lanka. Furthermore, to our knowledge, this study is the first research in examining the inter-temporal relationship between workers' remittances and consumption expenditure in Sri Lanka.