Essays on remittances, R&D and macroeconomy

Abstract

This thesis is a collection of three self-contained empirical essays on remittances and R&D but unified by their importance to developing economies' economic growth, productivity, and the macroeconomy. The first essay revisits the debate on remittance and economic growth by examining whether there is a 'remittance trap' or threshold above which remittance starts to affect growth negatively. The study uses a relatively new econometric method known as Ordinary Least Squares regression with an identification strategy in the presence of heteroscedasticity to validate the results obtained from OLS and the system GMM. The usage of OLS-IH in the remittance and growth literature is a new contribution. Using a large panel dataset of 70 countries, the study finds that remittances appear to have a negative effect on growth between 1975-early 2000. This threshold appears to be 6.9% of the GDP. However, when a recent dataset up to 2018 was included, the threshold effect of remittances on growth started to disappear. Whether this vanishing effect in the post-2000 is due to the actual change in the relationship between remittances and growth or measurement errors associated with how remittances are compiled across countries remains a puzzle. Hence, this study reinforces that the remittances and growth debate remains inconclusive and needs to find better evidence and data. The second essay examines the short term macro-economic impact of remittances using a case study of Nepal. Despite the massive inflow of remittances during the turn of the century, the quantitative impact of remittances on the Nepali economy remains largely unexplored. Furthermore, macroeconomic modelling of the Nepali economy is at the infant stage primarily due to the unavailability of reliable data. Hence, using novel quarterly GDP data, this paper aims to fill both gaps by examining the effects of remittance and other macroeconomic variable shocks on the small open economy of Nepal between 2004 and 2019. Employing an SVAR model, the study finds that the impact of remittance shock on output (GDP) is not significant, but remittances significantly increased money supply and prices and appreciated the real exchange rate. These findings solve the price and exchange rate puzzles found in the earlier studies on Nepal. While foreign partners' output primarily drives the remittance inflows to Nepal, the real exchange rate also plays a non-trivial role, but the domestic GDP or the interest rate do not appear to have a significant impact on the remittance inflows. Most of the macro-economic variables do not respond to the policy rate; additionally, the reaction of money supply in response to a positive shock to inflation is not significant, which poses a further challenge to the policymakers in Nepal. Despite the monetary authorities in Nepal using money supply as the main tool of the monetary policy, the transmission channel remains impaired. The third essay estimates the effect of three types of R&D stocks on total factor productivity across Chinese provinces from 1998 to 2018. The study employs novel data at the provincial level in China and panel data co-integration, panel autoregressive-distributed lag, and spatial regression approaches. Notwithstanding prior analysis relating total factor productivity to R&D, the extension to include an explicit measure of the basic, applied, and experimental R&D is novel. The results are robust to various empirical models and control variables and find that experimental R&D exerts a positive effect, but basic R&D exerts no significant results, and the returns of applied R&D are mixed. Further analyses from 1991 to 2018 national data demonstrated essentially unchanged results. The finding is likely to be important for Chinese policymakers because studies on the US, Europe, and other advanced economies have shown that investments in basic research raise long-term productivity and per capita output. Show more