International Journal of Research and Innovation in Social Science (IJRISS) |Volume VI, Issue XI, November 2022|ISSN 2454-6186
Macroeconomic Determinants of Remittance for Bangladesh: A Gravity Model Approach
Md. Monir Khan1*, Ratna Khatun2, Asif Ahmed1, Sunita Rani Das1
1Assistant Director, Monetary Policy Department, Bangladesh Bank, The Central Bank of Bangladesh, Bangladesh
2Assistant Director, Research Department, Bangladesh Bank, The Central Bank of Bangladesh, Bangladesh
Abstract: A Gravity Model is used in this study to investigate the macroeconomic determinants of remittances for Bangladesh by using panel data of 10 host countries from 2002-2020. This paper not only uses Pooled OLS, REM and FEM models but also uses even more efficient econometric model, namely PCSE and IV regression model to explore the impact of the macroeconomic determinants of remittances for Bangladesh. This study finds that home country’s income level has significant impacts on remittances but not the host country’s income level. Private sector credit in the host nation affects remittances negatively but home country credit affects remittances positively. The transaction cost of remittances has adverse impact on remittances at the same time Religion affects remittances positively. Larger dependent population in home country reduces remittances similarly political stability in home country reduces remittances. Political instability in the host nation, on the other hand, is linked to an increase in remittances, indicating that migrants tend to send more money home when the host country is in upheaval. Policies aimed at lowering transaction costs, encouraging financial sector growth, and enhancing the business climate should be implemented to encourage remittances and optimize their economic benefit.
Key Words: Gravity Model, Bilateral Remittance, Exchange Rate, Instrumental Variable Regression, Domestic Credit
JEL Classification: C26, F24, C23, F14, E31
I. INTRODUCTION
Workers’ remittances, which significantly outweigh both official development aid (ODA) and portfolio investment, are the most important source of foreign finance after FDI. According to the World Bank, Bangladesh is the world’s eighth largest recipient of remittances. In 2020, officially recorded remittances to Bangladesh amounted to $18205.01 million. (Bangladesh Bank, 2020).
Developing countries’ remittances inflow has climbed by a factor of 10 in the previous ten years amounting $539.5 billion in 2020, an increase of -1.62 percent over $548.4 billion in 2019(World Bank, 2020). In Bangladesh, remittances have increased more than fivefold over the last one and half decades. This amount was $2848 million in 2002 and this reached $18205.01 million in 2018. This huge growth in remittance inflow may be attributed to the better monitoring and incentive-based policy to attract migrant remittances.