Macroeconomic Determinants of Diaspora Remittances. A Case Study in Kenya

Abstract

The World has become a global village with interaction moving from only physical interactions but also through online platforms. Traveling abroad for work has come a long way in that, it is easy to get a job in another country as compared with yester years. Opportunities now are easily accessible through one’s internet-enabled mobile phone. While Kenyans opt to go abroad for greener pastures, they leave behind families back at home who rely on them or those that need to be supported and uplifted financially. Migrants also feel the need to invest back home to safeguard their future when they retire or come back to their home countries. Throughout the years, remittances have been on an upward trend in Kenya with the presence of mobile money platforms, making it easier for one to receive remittances. However, little is known of the drive of these inflows, especially from a macroeconomic perspective. This paper, therefore, studies the impact of the macroeconomic variables namely, GDP, inflation and the real effective exchange rate. The study used the bound testing approach to cointegration and error correction model which are developed in the Autoregressive Distributed Lag (ARDL) model, to evaluate the existence of long-run and short-run relationships between remittances and the selected macroeconomic variables. The ARDL model was the best fit since one of its advantages is that it allows variables to have a combination of I(0) and I(1), and none of the variables were I(2). The study used 52 observations that is from 1970-2021 analyses were done using EViews version 12. Using this approach, results show that there exists a long-run relationship between remittances and the GDP, inflation, and real effective exchange rate. The findings also suggest that GDP plays a significant role in remittances while inflation and the real effective exchange rate are less significant but play a role. Remittance growth falls when GDP growth rises while remittances increase when inflation and real effective exchange rates are on the rise. Therefore, policies to attract remittances for investment and saving products should be embraced especially in favorable economic conditions.