Bi-directional Causality Between Remittances and Poverty: An Empirical Evidence From Pakistan.

Abstract

This study explores the two-way causality between poverty and remittances in Pakistan. The empirical evidence is based upon ARDL double bound approach for the long run relationship between remittances and poverty and VECM was used for direction and magnitude of causation. Furthermore, variance decomposition and Impulse response functions were used to capture the standard deviation shocks. Poverty (head count ratio) and remittances to GDP ratio were used from 1973-2006 for analysis purpose. In the study two equations were used interchangeably as dependent variable. It was found by using the Narayan (2005) test criteria for small sample there is co-integration found between poverty and remittances. The relationship is further supported by long run and short run analysis by ECM. Poverty and remittances are inversely and significantly related in the short run and long run by the estimates of ECM. VECM confirms the results by providing the short run and long run significant estimates. The results are also corroborated with variance decomposition and impulse response function. It could be concluded from the results that remittances are playing a vital role after the foreign direct investment. It is also found that due to altruistic behavior, inflow of remittances is increasing due to the poverty and it provides safety nets to poor and ultimately helping to reduces poverty.

Key Words: Remittances, Poverty, ARDL, VECM and co-integration

JEL classification: O11,O15