Do remittances affect output? Evidence from Lebanon

This paper examines the effects of remittances on output for Lebanon, a case with a unique setting: remittances to Lebanon are primarily from workers located in oil-producing Gulf States and thus influenced by oil prices. This setting enables us to estimate a structural VAR model using the price of oil as an instrument. We estimate the model with and without the instrument and compare the impulse response of remittances. Our key results are as follows: without the instrument, we find that a one-standard deviation shock in remittances increases industrial production by about 0.10% to 0.20%, a small and weakly estimated effect. In the instrumental variable setting, the magnitude increases by a factor of at least 5.8: the increase in output ranges from 0.72% to 1.11%. Our results imply that remittance effects on output computed using standard VARs are likely underestimated. Moreover, they suggest that the adoption of policies that facilitate remittance flows should be encouraged as they likely stimulate economic growth by more than previously detected.