The asymmetric impact of oil prices on remittances: evidence from India

Abstract

Remittances make up a sizeable part of the Indian economy. Using recently advanced non‐linear autoregressive distributed lag (NARDL) model (Shin et al, 2014), this study aims to address the asymmetric impact of oil prices on international remittances over the period 1975–2017, in the context of India. The results reveal that: (i) changes in oil prices and remittances are asymmetrically associated in both short and long run; (ii) remittances react differently to changes in oil prices: while positive movements in oil prices lead to an increase in remittances, negative movements lower remittances; (iii) compared to positive oil price shocks, negative shocks have more profound impact on remittances in the long run; (iv) exchange rate has an asymmetric effect on remittances only in the short run; (v) financial development has negative influence on remittance inflows in the long run; and (vi) GDP per capita does not have any significant impact on remittance inflows in the long run, whereas it negatively affects remittances to India in the short run.

Macroeconomic determinants of remittances to India

“…That means a one percent change in the exchange rate leads to a − 0.68 percent reduction in remittances to India. This finding suggests substitution effect in remittance sending behaviour and agrees with the findings of Ojede et al ( 2019 ), Akçay and Karasoy ( 2019 ), and Abbas ( 2020 ).…”

“…The migrants with investment motives exploit the exchange rate fluctuations and send more money to the home country to accumulate durable or fixed assets. This positive impact of domestic currency depreciation on remittances is found in Pakistan and India in the long-run (Akçay and Karasoy 2019 ; Abbas 2020 ). On the contrary, Ojede et al ( 2019 ) point out that domestic currency depreciation reduces remittances to Uganda.…”

“…The exchange rate also affects remittances as the sum of two opposite effects: wealth effect and substitution effect (Akçay and Karasoy 2019 ). A rise in the value of money earned in foreign currency increases the purchasing power of migrants in terms of domestic currency, thereby inducing the wealth effect among the receiving households.…”

Impact of oil prices on remittances to Pakistan from GCC countries: evidence from panel asymmetric analysis

“…Faini (1994) urged that the depreciation of local currency would affect workers' remittances through wealth and substitution effects, which are shaped by the self-interest ad altruistic motives. The depreciation of home currency increases the value of earned foreign currencies and stimulate remittances for self-interest objectives to buy house, land, and other consumer durable assets (Al-Mashat and Billmeier 2012;Abbas et al, 2017;and Akçay and Karasoy 2019). Whereas, if remittances are motivated by the altruistic objectives or repaying loans, a depreciation of home country's currency would reduce the dollar equivalence of loan denominated in domestic currency and reduce remittances that reflect the substitution effect (Yang, 2008;and Ojede et al, 2018).…”

“…Akçay (2019) has investigated the asymmetric effect of crude oil prices and remittances outflow from Oman from 1975 to 2015 by using asymmetric autoregressive distributed lag (ARDL) model and validated the asymmetric effect of changes in crude oil prices and remittances outflow from Oman in both short-run and long run. Akçay and Karasoy (2019) have examined the asymmetric effect of oil prices on international remittances inflow to India by using a non-linear autoregressive distributed lag (NARDL) model from 1975 to 2017. The findings have revealed that changes in oil prices and remittances are asymmetrically associated.…”