Asymmetric responses: exchange rate shocks, financial development, and remittance flows in South Asia

Abstract The recent literature evidences the non-linear and asymmetric effects of exchange rates and financial development. This study examines the asymmetric effects of exchange rates and financial development on remittance inflows in South Asia. Employing the Non-linear Autoregressive Distributed Lag (NARDL) method on panel data of five South Asian countries (namely Bangladesh, India, Nepal, Pakistan, and Sri Lanka) for the period 1985–2024, the study found significant asymmetric effects of exchange rate and financial development on remittance receipts. The findings suggest that, in the long-run, appreciation of home currency (that is negative changes in the exchange rate) significantly increases remittances, while depreciation of a home currency (that is positive fluctuations in the exchange rate) reduces these financial flows. In the short run, the results are opposite (though significant only for the appreciation effects). The magnitude of exchange rate appreciation on remittances in the long-run is relatively greater than that of depreciation. Further, the negative shocks in financial development reduce remittances while positive shocks increase remittance inflows in the long-run, indicating their complementary role. In the short-run, the positive and negative effects of financial development on remittances differ from those in the long-run (though significant only for the positive effects). The findings offer critical policy insights for policymakers in South Asian countries, highlighting that remittance responses are not linear and depend critically on the direction of exchange rate movements and the health of the financial sector.