Remittances and Household Consumption Instability in Developing Countries

The impacts of international migrants’ remittances on household consumption volatility in developing countries

“…To our knowledge, only Combes & Ebeke (2011) examined the impacts of remittances on household consumption instability in developing countries using data from 1975 -2004. They found that remittances can significantly reduce the consumption instability in developing countries by playing the role of insurance during periods of negative income shocks.…”

“…Following the work of Bugamelli & Paterno (2009), Combes &Ebeke (2011), andJidoud (2015), the standard deviation of household consumption per capita growth is defined as the volatility of consumption in this study. Although the volatility of private consumption is driven by a number of factors such as economic shocks, the factors of household income elasticity to these shocks, and the factors of household consumption elasticity to household income shocks, various country characteristics 6 are also responsible for household consumption volatility (Wolf, 2004).…”

“…Likewise, the trade openness variable is also used expecting a positive correlation ( 3 > 0) with the consumption volatility (Di Giovanni & Levchenko, 2009). In addition, a positive sign for the _ , variable, 4 > 0, is expected to grasp the collective shocks on volatility of household consumption in developing countries (Herrera & Vincent, 2008;Combes & Ebeke, 2011). Since government investment in fixed capital formation, such as investment in land improvements, construction of roads, schools, hospitals and so forth, is an important factor for facilitating household consumption, _ , is included expecting a positive relation, 5 > 0, with consumption volatility.…”

“…Again, the _ , variable is included to capture the financial development of a country assuming that the efficiency of the financial market could largely influence the extent of consumption volatility in developing countries (Ahmed & Suardi, 2009;Bekaert et al, 2006). Since the availability of bank provided private sector credit is an important determinant for household consumption smoothing, the ratio of bank provided private sector credit to GDP is treated as the proxy for financial development (Combes & Ebeke, 2011).Two alternative variables, namely broad money (M2) to GDP ratio (M2/GDP), and the banks' deposit to GDP ratio are used as alternative measures of financial development to reexamine the stabilising role of remittances on the consumption volatility. The financial openness variable is used to capture the effect of the global financial systems on consumption volatility.…”

“…The estimation of the above equation using the Ordinary Least Squares (OLS) estimator will be biased and inconsistent because the lagged dependent variable is correlated with the error term due to the presence of fixed effects (Combes & Ebeke, 2011). Hence, the system GMM estimator is employed in this study since it allows for the lagged differences and lagged levels of the explanatory variables as an instrument.…”