Empirical relationship between workers' remittances and financial development (an ARDL cointegration approach for Sri Lanka)

Purpose The purpose of this study aims to investigate the nature of the relationship between workers' remittances and financial development (FD) in Sri Lanka for the period from 1975 to 2017. Design/methodology/approach This study used both the exploratory data analysis and inferential data analysis (IDA) techniques to test the objective of this study. The IDA technique consisted of the augmented Dickey-Fuller (ADF) and Phillips-Perron unit root tests, the autoregressive distributed lag (ARDL) bounds cointegration technique, the Granger causality test and impulse response function analysis. Findings The unit root test results show that the variables are in mixed order. The empirical results of cointegration confirm that workers' remittances have a beneficial long-run relationship with FD in Sri Lanka. The Granger causality test result indicates that there is a bidirectional relationship between workers' remittances and FD. The impulse response analysis indicates that a positive shock to workers' remittance has an immediate significant positive impact on the FD of up to 10 years. Practical implications The analytical techniques used in this study explain how workers' remittances induce FD in Sri Lanka. Originality/value This study fills an important gap in the academic literature by using newly developed ARDL bounds cointegration techniques in Sri Lanka, by using impulse response function analysis, and by studying the dynamic relationship between workers' remittances and FD using time series data.