Credit Quality in Developing Economies: Remittances to the Rescue?

This paper analyzes the link between remittance inflows and non-performing loans (NPLs) in a sample of developing countries. The analysis is based on regression techniques applied to panel data from 141 countries for the period 2000 to 2011. The paper finds a significant role of remittance inflows in reducing the size of NPLs in recipient countries. Based on the regression analysis, it indicates a stronger marginal impact of remittances in a context of high macroeconomic instability, suggesting a significant effect of remittances on the likelihood of the private sector’s credit default during shocks. It also states that the results from the estimation hold even after factoring in the endogeneity of remittance inflows and the use of an alternative estimator aimed at dealing with bounded dependent variables. The paper covers the following sections in detail:

• Background on the relationship between remittances and NPLs with a review of existing theoretical and empirical literature;
• Specification of the regression model and a discussion on the data used for estimation;
• Results with a focus on baseline estimates and robustness checks;
• Concluding remarks and a discussion on policy implications.