Disentangling the relationship between remittances and financial development: evidence from Jamaica

This article examines the relationship between remittances and financial development in Jamaica using annual data from 1976 to 2016. We apply Principal Component Analysis to construct an index which captures the dimensions of different indicators of financial development. Using an ARDL approach to construct an error-correction model and the Toda-Yamamoto test to examine causality, we distinguish between the long-run and short-run dynamic linkages between remittances and financial development. Utilizing several financial development models to account for the various empirical relationships in the literature, we find that remittances promote financial development in the long run, while substituting for financial development in the short run. Additionally, the long-run effect is larger, and there is a lag before the short-run effects are realized. These findings suggest that remittances may have different roles in the process of economic development. Thus, differentiating long-run and short-run policies are likely to be important to harness the developmental impact of remittances.