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For many labor exporting developing countries, it is well documented that migrants’ remittances constitute a large portion of external resources, even without considering the significant amount of flow through unofficial channels (El-Sakka & McNabb, 1999; Glytsos, 2005). A World Bank (2006) report shows that recorded remittance flows to developing countries doubled in the five years after 2000 and have continued to increase. The amount of remittances to developing countries increased to $251 billion in 2007, which is 11 per cent higher than the amount in 2006 (Ratha et al., 2008). The magnitude and significance of remittance flows have motivated researchers and policy-makers to improve their understanding of remittances with regard to: a) the remittance-sending behavior of migrants, or their motivation to remit; and b) its impact on different macroeconomic variables, such as consumption, investment and economic growth.
From a macroeconomic perspective, there is no unanimous theory that explains migrants’ behavior of remitting funds to their home countries. Remittance flows could be the result of migrants’ altruistic behavior (Johansen & Whitelaw, 1974), self-interest attitude (Lucas & Stark, 1985) or the enlightened self-interest motivation (Lucas & Stark, 1985). Empirical results on the relationship between remittances and other macroeconomic variables have also remained ambiguous in the existing literature. Brown (1994), Durand et al. (1996), Ziesemer (2006), Giuliano and Ruiz-Arranz (2006), and Loxley and Sackey (2008) argued that remittances had a positive impact on investment and economic growth. On the other hand, Stahl and Arnold (1986), Stahl and Habib (1989), and Glytsos (1993) argued that the growth effect of remittances came from increased consumption.
The disparity in the findings of the previous studies raises a number of questions: 1) Are remittances used for consumption or investment? 2) Do remittance flows in developing countries go up during periods of economic downturn? 4) Do migrants behave altruistically? 5) Are migrants guided by the self-interest motivation? These questions are intriguing for policy-makers of developing countries and thus, need to be verified empirically.
This study attempts to fill the existing gap in literature by addressing these questions. We first investigate the effect of remittances on macroeconomic variables, such as the investment rate, the consumption rate, and GDP growth. Different macroeconomic effects of remittances are then used to analyze the remittance behavior of migrants. This investigation is different from the existing literature in many ways. First, while empirical microeconomic literature commonly explains the remittance behavior of migrants, we attempt to investigate remittance behavior using macro-level data. To our knowledge, using macroeconomic data to explain migrants’ behavior is unique. Second, from a methodological point of view, we use a recently developed instrumental variable approach (two-step generalized method of moments) to accommodate the persistence characteristic of time-series variables. Finally, some policy suggestions, based on our empirical results, are provided in the last section.