Do Remittances Induce Inflation? A study for Developing Countries

The academic literature on the economic impact of workers' remittances has overwhelmingly concentrated on their positive effects on economic growth. This focus is largely because these financial inflows are widely perceived as a vital source for financing capital formation in recipient countries, thereby stimulating investment and national income. As a stable and significant source of foreign currency, remittances are often celebrated for their potential to foster development where traditional capital is scarce. However, this prevailing narrative often overlooks potential macroeconomic drawbacks. Beyond the beneficial impact on growth, substantial remittance inflows may disrupt the stability of the general price level. By increasing aggregate demand and potentially expanding the money supply, these funds can exert significant upward pressure on domestic prices, leading to higher inflation. This study, therefore, shifts the focus to this less-explored consequence. The primary objective is to empirically determine the effect of remittances on the inflation rate within the four developing countries that receive the highest volume of such inflows globally. Using a comprehensive dataset spanning the period from 1990 to 2020, the analysis employs three robust panel data methodologies: Fixed Effects (FE), Random Effects (RE), and the one-step system Generalized Method of Moments (GMM). The findings of the study provide compelling evidence for the conclusion that remittances do, in fact, induce a higher inflation rate in the host country, highlighting a critical policy consideration for macroeconomic management