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Research Objective

To explore the relationship between exchange rate volatility and foreign remittances in SAARC countries from 2000 to 2023.

Methodology

The study employs the Cross-Sectional Autoregressive Distributed Lag (CS-ARDL) model. Data for remittances, foreign reserves, trade, foreign direct investment (FDI), political stability, and GDP growth were sourced from the World Development Indicators (WDI) for eight SAARC nations (2000-2023). Exchange rate volatility was calculated using the GARCH method. Two models were estimated: Model 1 with remittances as the dependent variable, and Model 2 with exchange rate volatility as the dependent variable. Granger causality tests were also conducted.

Methodology Flowchart

                        graph TD
    A["Data Collection WDI, GARCH for ERV"] --> B["Model Specification: CS-ARDL"];
    B --> C["Model 1 Estimation"REM as DV""];
    B --> D["Model 2 Estimation"ERV as DV""];
    C --> E["Long-run and Short-run Results"];
    D --> E;
    E --> F["Granger Causality Analysis"];
    F --> G["Results Interpretation"];
    G --> H["Conclusion and Policy Recommendations"];                    

Discussion

The study highlights the complex interplay between exchange rate volatility and foreign remittances in SAARC countries. Positive GDP growth and inflation encourage remittances, while exchange rate volatility, trade, and political instability deter them. Conversely, stable GDP growth, trade, FDI, and remittances help stabilize exchange rates, whereas inflation contributes to volatility. The findings suggest that managing exchange rate volatility is crucial for enhancing remittance inflows, and vice versa, with bidirectional causality observed in several key relationships.

Key Findings

- Model 1 (Remittances as Dependent Variable): GDP growth and inflation have a positive relationship with remittances. Exchange rate volatility, trade, and political stability have negative relationships with remittances.
- Model 2 (Exchange Rate Volatility as Dependent Variable): Inflation has a positive relationship with exchange rate volatility. GDP growth, remittances, trade, FDI, and foreign reserves have negative relationships with exchange rate volatility.
- Granger Causality: Bidirectional causality exists between exchange rate volatility and remittances, GDP growth and remittances, trade and remittances, inflation and remittances, FDI and remittances, inflation and exchange rate volatility, and foreign reserves and exchange rate volatility. Unidirectional causality was found in several other pairs.

Conclusion

The study confirms both long-run and short-run relationships between exchange rate volatility and foreign remittances in SAARC countries. The findings provide valuable insights for policymakers aiming to manage exchange rate volatility and enhance remittance inflows, emphasizing the need for policies that foster economic growth, control inflation, promote trade, attract FDI, and ensure political stability.

Fact Check

1. Time Period: The study covers the period from 2000 to 2023. (Confirmed in Abstract and Conclusion)
2. Methodology: The primary econometric model used is the Cross-Sectional Autoregressive Distributed Lag (CS-ARDL). (Confirmed in Abstract and Methodology)
3. Number of SAARC Countries: The study analyzes data from eight SAARC nations. (Confirmed in Abstract and Conclusion)

Mind Map