Dynamic Impact of Workers’ Remittances on Financial Development in Sri Lanka

Abstract

The objective of this study is to examine the dynamic impact of workers’ remittances on financial development in Sri Lanka using the annual time series data over the period of 1975-2017. In order to attain the objective, the Augmented Dickey-Fuller (ADF), and Phillips and Perron (PP) unit root tests, and the autoregressive distributed lag (ARDL) bound cointegration technique are employed. The unit root test results indicate that the variables used in this study are stationary at 1st difference. The test result of ARDL reveals that workers’ remittances in Sri Lanka have a long-run relationship with the financial sector but not in the short-run. The coefficient of the error correction term indicates that 18.6 percent of error is corrected each year and further it is explained that the response variable of the financial development moves towards the long-run equilibrium path. The diagnostic test results confirm that the estimated model is robust. Therefore, this study recommends that policymakers should consider the findings of this study when they form financial development policies.