Remittances and the Growth Nexus in Bangladesh: A VECM Based Study

Bangladesh is one of the world’s top remittance receiving nations. However, the macroeconomic channels through which remittance inflows affect long run economic growth have not been sufficiently explored. This study investigates the influence of remittances on the economic growth of Bangladesh from 1976 to 2021. We introduced foreign direct investment (FDI), official development assistance (ODA), exports and imports as control variables in our model. Annual data on each variable were collected from the World Development Indicators (WDI). The Augmented Dickey Fuller (ADF) test results identified that all variables are integrated of order one. Following that Johansen cointegration test confirmed a stable long run equilibrium relationship among the variables. Then, we employed Vector Error Correction Model (VECM) to estimate both short run and long run dynamics. The findings indicate the existence of a long run relationship among all the chosen variables. Specifically, remittances exert a positive significant effect on the growth of the Bangladesh economy. The error correction term (ECT) indicates that the system will eventually reach a long term equilibrium with a 26% annual adjustment rate in response to any short run disturbances. The Granger Causality test reveals unidirectional causality from remittance to economic growth. Overall, the findings suggest that remittances play a crucial role in promoting sustainable economic growth in Bangladesh, even after controlling for other external capital flows. Therefore, policymakers should strengthen formal remittance channels and encourage the proper utilization of remittance inflows.