The impact of remittances on savings, capital and economic growth in small emerging countries

Abstract : This paper uses an OLG model in order to capture the economic and demographic effects of remittances in small open economies. We describe household decisions on education and savings, where elderly people receive remittances and domestic transfers from their children. Due to a boost in returns from human capital investments as well as higher levels of productivity elsewhere, remittances increase education at the expense of domestic savings. A significant negative correlation is thus found between domestic savings and remittances in a large set of countries. The model also predicts inverted U-shaped curves between remittances and economic growth because of this substitution effect. Furthermore, we conduct a counterfactual analysis on five Caribbean islands, which shows that different strategies regarding domestic transfers and remittances may be successful in fostering growth, depending on the scale of migration or the transfer rate.