THE IMPACT OF REMITTANCES ON GDP GROWTH IN BANGLADESH: AN ARDL BOUNDS TEST APPROACH

Abstract

This paper will analyze how remittances affect GDP growth in Bangladesh based on annual data between 1991 and 2023, which is obtained via the World Development Indicators (WDI) database. The paper uses the Autoregressive Distributed Lag (ARDL) bounds testing model provided by Pesaran, Shin and Smith (2001) to understand both short run and long run dynamics of GDP growth, personal remittances received and consumer price inflation. The Augmented Dickey-Fuller (ADF) unit root tests indicate that GDP growth and inflation are at the stationary level I(0) and remittances are integrated of order-one I(1) which justifies the use of ARDL framework. The unanimous choice of lag selection criteria under FPE, AIC and HQ is lag 2, whereas the Schwarz Criterion chooses lag 1 and favours ARDL (2,2,2) as the preferred specification. The F-statistic of 6.455377 is greater than the upper critical bound at the 1% significance level indicating that the cointegrating relationship between the three variables is strong in the long-run. The long-run coefficient of remittances is found to be statistically significant and positive (6.93E-05; p = 0.0186), which implies that the inflows of remittances have a significant impact on long-run GDP growth in Bangladesh. Whereas positive, inflation turns out to be statistically insignificant in the long run (p = 0.2786). The coefficient of error correction of -0.9210 (p = 0.0000) means that about 92% of short-run variations of the long-run equilibrium are countered in a year, which means that the adjustment mechanism is highly efficient. Diagnostic testing ensures the lack of serial correlation (p = 0.7569) and heteroskedasticity (p = 0.06) and CUSUM and CUSUM of Squares tests ensure structural stability over the sample period. These results are very much empirical evidence of the remittance-led hypothesis of growth in Bangladesh and have significant policy implications of how to increase remittance inflows and direct them into productive investment.