The Effects of Remittances on Economic Growth Through Institutional Quality in the European Union Member States

Studies have produced very different conclusions about remittances’ economic impact. Remittances positively and negatively contribute to various economies. Regarding their positive effects, remittances increase capital availability, stimulate investment, and increase consumption. In contrast, remittances are associated with increased inequality, lower wages, and lower government spending. This paper examines how remittances and institutions affect economic growth and whether institutions can mitigate the effects of remittances. It examines European Union member states from 1995 to 2019. We use a two-step system GMM estimation technique to analyse remittance and institution data. Analysis results show that well-developed institutional frameworks improve remittance impact. Furthermore, healthy institutions channel remittances more efficiently, which results in higher output than healthy institutions. Thus, to the extent that policies that promote increased freedom of economic activity are promoted, national economies will benefit more from remittances.