Output Growth Volatility, Remittances, and Financial Development in the Common Market for Eastern and Southern Africa Region: A System Generalized Method of Moments Approach

The paper aims to empirically examine the effect of remittances on output growth volatility conditional on the level of financial development. Our analysis covers 17 common markets for Eastern and Southern Africa member countries over the period from 1981 to 2019. The study adopted an endogeneity-robust system generalized methods of moments estimator developed for a dynamic panel model as a method of analysis. The findings revealed that remittances do have a dampening effect on output growth volatility, which supports the counter-cyclicality argument and is consistent with theoretical and empirical intuitions. We also found that the growth volatility reduction potential of remittances was found to be more pronounced in the presence of a well-functioning financial system. The results are robust in terms of different measurements of output volatility. Based on the findings, we can reaffirm that the growth volatility-stabilizing influence of remittances is an increasing function of the level of financial development.