Impact of Personal Remittances on Economic Growth of Pakistan: A Multivariate Cointegration Analysis

Abstract

The study targets the impact of personal remittances on economic growth in case of Pakistan for the time period 1980-2014. For this purpose, Foreign Direct Investment (FDI) and Human Capital are used as control variables. Using Augmented Dickey Fuller (ADF) and Philips-Peron (PP) unit root tests, all the variables came stationary at order one or I (1). Johansen Cointegration showed a long run relationship between personal remittances, FDI, human capital and economic growth. The results showed a positive long run impact of personal remittances, FDI and human capital on economic growth of Pakistan. Similarly, ECT (-1) term was -0.04 and also significant. Granger causality also showed a unidirectional causality running from personal remittances to economic growth. Moreover, the diagnostic tests showed normality of residuals, no autocorrelation and stationarity of residuals at level. Government should formulate such policies that encourage remittances in Pakistan by formulating reliable and efficient transfer mechanism to cheap transfer cost.

Keywords: Personal Remittances, FDI, Economics Growth