Do neighboring countries matter when explaining bilateral remittances?

Résumé

We measure to what extent neighboring countries affect the amount of remittances between a source and a recipient country, controlling for the commonly used macro determinants of remittances(such as, economic activity, inflation, distance and transaction costs). For the study, we rely on bi- lateral remittances’ data involving 67 source countries and 129 recipient countries all over the word. We provide novel evidence on the importance of neighbouring countries on remittance flows, with the parameter estimates capturing origin- and destination-spatial dependence being both positive and significant. This result is crucial, because disregarding the role of neighbouring countries leads to biased estimates for the determinants of remittances and misprediction. Indeed, prediction errors decrease by 67% when we correctly account for the role of neighbouring countries (relative to the standard non-spatial model for bilateral remittances). By properly accounting for the role of neighboring countries, we then re-examine the altruism and investment motives to remit. Finally, we apply our model estimates to quantify the expected negative impact of the COVID pandemic shock on the bilateral remittances. Interestingly, we find that remittances may be more resilient for low-and middle-income countries, which are the ones that rely on remittances the most.