Impact of remittances on domestic investment in West African countries: the mediating role of financial development

Abstract

AbstractSeveral studies have analyzed the effect of remittances and financial development on growth or investment with little attention on their interactive effect. This study examines the relationship between remittances, financial development and domestic investment under different levels of financial development in a panel of 10 Sub-Saharan African countries. The research uses data covering the period 1975–2019 and employs panel Pooled Mean Group estimator. The results reveal that both remittances and financial development have positive effects on domestic investment. The positive interactive effect lends credence to that remittances and financial development act as complements in enhancing domestic investment. This suggests that financial sector is a strong transmission channel through which remittances positively affect investment in West African countries. The results further reveal that there exists a threshold effect of financial development in the remittances and investment nexus. More precisely, beyond a threshold of domestic credit to the private sector of about 21% of GDP, there is a positive and significant relationship between remittances and investment rate, while this relationship is negative under the threshold. It is, therefore, recommended that West African countries should adopt appropriate policies to increase their financial sector and lower transaction costs so that gains from remittances can effectively be channeled into investment and growth. In sum, issue of the mediating role of financial development needs to be taken into consideration in the examination of the nexus between remittances and investment.