Testing for Causality between Remittances and Inflation: Evidence from Central and Eastern Europe

Abstract

The goal of this study is to examine the impact of remittance inflow on inflation using the System Generalized Method of Moments (SGMM) and Dumitrescu-Hurlin Granger causality approach in countries from Central and Eastern Europe over the period 1994 to 2019. As the levels of economic and financial development vary considerably across these countries and some of them are member states of the European Union (EU), we split them into two more homogenous groups — EU member states and non-EU countries. The application of the SGMM approach reveals that remittances have a negative and significant impact on inflation in the non-EU countries, whereas they exert positive impact in the EU member states and in the whole region overall. The Granger causality test shows a unidirectional causal relationship between remittances and inflation in all country groups, whereas the existence of a positive causal relationship from remittances to inflation has been established in twelve countries.

Keywords: Inflation, Remittances, Central and Eastern European countries, Dumitrescu-Hurlin Granger causality approach, System GMM.

JEL: C23; E61.