Remittance-Domestic Investment Nexus in Ethiopia: Evidence from the Autoregressive Distributed Lag (ARDL) Model

Abstract

Remittances play a pivotal role in narrowing the saving-investment gap in developing countries. However, empirical studies on the impact of remittances on domestic investment are limited, and even the results of the existing studies are at best inconclusive, especially for developing countries. The main objective of this study was to examine the remittance-domestic investment nexus in Ethiopia, with control variables, including lending rate, real gross domestic product (RGDP), inflation, and national saving employing time series data from 1981-2021. The autoregressive distributed lag (ARDL) model, together with its short-run error correction (EC) representation, was employed to analyze the data. The results showed that remittance had a statistically insignificant negative short-run but a significant positive long-run impact on domestic investment. These findings indicate that the government of Ethiopia should encourage and implement policies to channel remittances into productive investments in the effort to bring economic development to the country.