Financial development, remittances and economic growth: A threshold analysis

Peprah, James Atta; Ofori, Isaac Kwesi; Asomani, Abel Nyarko Article — Published Version Financial development, remittances and economic growth: A threshold analysis Cogent Economics & Finance Suggested Citation: Peprah, James Atta; Ofori, Isaac Kwesi; Asomani, Abel Nyarko (2019) : Financial development, remittances and economic growth: A threshold analysis, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, London, Vol. 7, Iss. 1, https://doi.org/10.1080/23322039.2019.1625107 This Version is available at: https://hdl.handle.net/10419/231266 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ GENERAL & APPLIED ECONOMICS | RESEARCH ARTICLE Financial development, remittances and economic growth: A threshold analysis James Atta Peprah 1 , Isaac Kwesi Ofori 2 *and Abel Nyarko Asomani 3 Abstract: Sources of economic growth in Ghana have not been clear. Several studies have contributed to the finance and growth literature with little attention on remittances and the joint effect of financial sector development and remittances. This paper uses macrodata to examine the linkages between financial development, remittances and economic growth in Ghana. We estimate a dynamic heterogeneous Autoregressive Distributed Lag (ARDL) model to show that financial booms are not, in general, growth-enhancing, and a certain level of financial development can drag down economic growth in the long term and the combined effect of financial development and remittances should be of concern to policymakers. Subjects: Economics; Political Economy; Finance; Business, Management and Accounting; Industry & Industrial Studies Keywords: Financial development; remittances; economic growth; Ghana JEL Classification: F22; F43; O16; O40 ABOUT THE AUTHORS James Atta Peprah obtained his PhD degree in Economics from the University of Cape Coast, Ghana. Dr. Atta Peprah is currently the Head, Department of Applied Economics, School of Economics, University of Cape Coast. His research interest focuses on development economics, financial economics and enterprise development. Isaac Kwesi Ofori holds MPhil. in Economics from the University of Cape Coast, Ghana. Mr. Ofori is a Demonstrator at the Department of Data Science and Economic Policy, School of Economics, University of Cape Coast. His research interests are public sector economics, international economics, and economic growth and development. He is an active member of the African Economic Research Consortium (AERC), Kenya. Abel Nyarko Asomani holds MPhil. in Economics from University of Cape Coast, Ghana. His research interests are economic growth and development, and monetary economics. He is an active member of the African Economic Research Consortium (AERC), Kenya. PUBLIC INTEREST STATEMENT Remittances and financial development have both been identified as growth boosters. Though the individual effects of remittances and financial development on growth have been explored in Ghana, little is known of the joint effect of the two variables. In addition, the study determined the threshold effect of financial development on economic in Ghana. The paper uses macro data to examine the linkages between financial development, remittances and economic growth in Ghana. We estimate an ARDL model to show that financial booms are not, in general, growthenhancing and a certain level of financial development can hamper growth in the long term. Peprah et al., Cogent Economics & Finance (2019), 7: 1625107 https://doi.org/10.1080/23322039.2019.1625107 © 2019 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license. Received: 05 November 2018 Accepted: 26 May 2019 First Published: 28 May 2019 *Corresponding author: Isaac Kwesi Ofori, School of Economics, University of Cape Coast, Ghana E-mail: [email protected] Reviewing editor: Mariam Camarero, Economics, Universitat Jaume I, Spain Additional information is available at the end of the article Page 1 of 20 1. Introduction Financial development and remittances have been identified as major drivers of growth especially in developing countries (Chowdhury, 2016; Nyamongoa, Misatib, Kipyegonb, & Ndirangu, 2012). By lowering the costs of accessing credit, a well-functioning financial market can help direct remittances to projects that yield the highest return and therefore enhance economic growth (Giuliano & Ruiz-Arranz, 2009). There is also the argument that remittances can be used as a substitute for inefficient or non-existent credit markets by helping local entrepreneurs bypass the lack of collateral or high lending costs and start productive activities. Since the last quarter of the twentieth century, the inflow of remittances to developing countries has increased significantly (World Bank, 2014). In effect, remittances have become the secondlargest source of external finance after foreign direct investment (see Aggarwal, Demirgüç-Kunt, & Peria, 2011; Giuliano & Ruiz-Arranz, 2009; Glytsos, 2005). In specifics, statistics from the World Bank (2014) points out that over the past 40 years, total workers’remittance inflows to developing countries rose from a modest US$0.3 billion in 1975 to more than US$404 billion in 2013 (Chowdhury, 2016). For instance, the World Bank (2013) projected that from 2013–2015, remittance inflows to developing economies was expected to grow at an average of 8.8% annually. Particularly, growth in remittances to low-income countries was projected to grow at a faster rate of 12.3 percent during this same period. This according to the report was because economic conditions in remittance-sending countries such as the United States were strengthened (World Bank, 2014; Chowdhury, 2016). With one-seventh of the world’s population migrating in search of better economic and social opportunities, remittance is expected to have some significant implications for economic development, especially in developing countries. Since antiquity, the sources of growth have been debated upon in the literature yet the everchanging drivers of growth means that the literature is not exhaustive. Among the classical sources of growth are surplus labour, physical capital investment, technological change, foreign aid, trade openness, resources, and foreign direct investment. Contemporary sources, on the other hand, include but not limited to innovations from research and development (R&D), remittances and financial development. In recent times, much emphasis has been laid on the possible effects of financial development and remittances on economic growth and inequality through job creation and poverty alleviation (Bang, Mitra, & Wunnava, 2016) Before 1983, the financial system of Ghana was monopolized by state-owned banks such as Ghana Commercial Bank, Agricultural Development Bank, Bank for Housing and Construction, National Investment Bank and a few others. Competition was rare so the notion was that liberalisation of the financial system would breed competition (Bawumia, 2010). One of the reasons for liberalising the financial sector in 1983 was to introduce competition into the banking and nonbanking financial sectors. Indeed, after 1983, the economy has witnessed the influx of foreign banks and more are yet to come. The liberalisation of the financial sector under Financial Sector Adjustment Programme (FINSAP) and Financial Sector Strategic Plan (FINSSIP) also brought about improved savings, enhanced deposit mobilisation, financial deepening and supposedly competition in the banking sector (Bawumia, 2010). Ghana’s new Banking Act of 2004 also brought some changes into the banking industry including the elimination of secondary reserves and increase in minimum capital requirement among others. The tremendous development in the financial sector does not seem to be translated into the desired growth and poverty reduction in spite of some progress that have been achieved in recent times (Aryeetey, Harrigan, & Nissanke, 2000; Bawumia, 2010) It is also imperative to note that the rate at which the financial sector develops matters. When the financial sector develops too fast, causing excessive financial sector deepening, it can lead to some form of instability in the sector. It may also encourage greater risk-taking and high leverage if poorly regulated and supervised. When it comes to financial deepening, there are speed limits. This puts a premium on developing good institutional and regulatory frameworks as financial Peprah et al., Cogent Economics & Finance (2019), 7: 1625107 https://doi.org/10.1080/23322039.2019.1625107 Page 2 of 20 development proceeds. Studies that have looked at financial sector development and economic growth have neglected the speed of adjustment in financial sector development and its impact on economic growth which is very important for policy implications. For instance, Cecchetti and Kharroubi (2015) argue that financial booms are not, in general, growth-enhancing and a certain level of financial development can be harmful to growth. This implies that there could be short-term and long-term effects of financial development on economic growth. However, this issue has not caught the attention of policymakers in Ghana. Similarly, the role of remittances on financial development in Ghana has not been given much attention may be due to its quantum in the past. Recent studies have looked at the impact of remittances on financial development in Africa (Karikari, Mensah, & Harvey, 2016) but how the pass-through affect growth rate was ignored. The study thus uses Ghana as a case study to test whether the magnitude of the joint effect of financial development and remittances inflow on growth is higher than their individual effects. This is premised on the fact that the potential of Ghana’s growing financial development and huge remittance inflow in spurring growth are only generally gleaned from public discourse without any empirical content. 2. Motivation and contribution to literature In recent times, Ghana has witnessed increasing levels of remittance inflow. In the presence of financial sector development, remittance is expected to spur growth and improve the livelihoods of the masses, especially, the poor and vulnerable households. However, this has not been explored empirically. The study seeks to fill this void in the literature and particularly on Ghana on three counts. First, the study seeks to provide evidence for the joint effect of financial development and remittances on economic growth. Though policymakers may be aware of this from intuition, the magnitude of the joint effect is what they are not aware of. The joint effect of financial development and remittances if present indicates that growth is enhanced through policies that target financial sector development and remittances simultaneously. Second, the study seeks to estimate the threshold effect of financial development on economic growth. Lastly, instead of using the shallow proxies such as the ratio of total credit to GDP, the degree of monetisation in the economy, and the ratio of domestic credit to the private sector to GDP, for financial development, the study employs the current financial development index generated by the World Bank. The rest of the paper is organised as follows. Section 3 presents survey of the literature on financial development and economic growth. Section 4 deals with estimation techniques and data issues. The results and discussion are presented in Section 5 and section 7 concludes the paper with some policy recommendations. 3. Literature survey 3.1. Financial development and economic growth The impact of financial development on economic growth follows the ground-breaking work of Schumpeter (1911) who contends that a well-functioning financial system can spur technological innovations (growth) through efficient allocation of resource from unproductive to productive sectors. Patrick (1966) followed suite with the supply-leading hypothesis arguing that the development of a robust financial sector can spur economic growth. Patrick (1966) was of the view that the creation of financial markets and their services well in advance of their demand will drive the non-financial (real) sector along the growth path, via the transfer of scarce resources from surplusspending units to deficit-spending units according to the highest rates of return on investment (see Aryeetey et al., 2000). A variant view of the supply-leading potential of financial development and stock market liquidity on economic growth is the much recognised financial liberalisation argument by McKinnon (1973) and Shaw (1973). In the same vein, King and Levine (1993) put forward an argument that financial development stimulates economic growth by increasing the rate of capital accumulation and by improving the efficiency with which economies use capital in the Peprah et al., Cogent Economics & Finance (2019), 7: 1625107 https://doi.org/10.1080/23322039.2019.1625107 Page 3 of 20 current and future periods. In addition, Calderon and Liu (2003) contend that financial deepening contributes more to economic growth in developing countries than in industrial countries, especially to total factor productivity (TFP) growth. Demirgüc-Kunt et al. (2011) and Aggarwal et al. (2011) find evidence of a positive relationship between remittances and financial sector development in developing countries. Particularly, Aggarwal et al. (2011) argue that the level of financial development proxied by bank deposits to GDP and bank credit to GDP increased significantly following remittances inflow in most countries. In addition, Mundaca (2009), using a dataset of 39 Latin American and Caribbean countries over the period 1970–2002, provided a convincing evidence of a complementarity between remittances and financial sector development in spurring growth. This evidence is corroborated by that of Nyamongo et al. (2012) who found complementary effects of remittances and financial development on growth for a set of 36 Sub-Saharan African countries from 1980 to 2009. In a more recent paper, Bang, Mitra, and Wunnava (2015) used macrodata for the period 1986– 2005 for 84 countries, with a strong argument that financial development measure such as financial reform could increase the flow of remittances via the investment motive (see Chowdhury, 2016). Bang et al. (2015) further argue that the relaxation of direct credit programmes, credit ceilings and greater autonomy for the banking sector have positive impacts in attracting remittances, while development of security markets, quality enhancement of banking supervision and the removal of restrictions on interest rate determination have a favourable effect on remittances and growth in the long-run. Overall, the net impact of financial reforms on remittances is slightly negative in the long-run (Chowdhury, 2016). In Ghana, empirical evidence on the finance–growth hypothesis is scanty except for the work of Adu, Marbuah, and Mensah (2013), Quartey and Prah (2008) and Esso (2010). For instance, Prah and Quartey (2008) provide evidence in support of the demand-following hypothesis, using the growth of broad money to GDP ratio as a proxy for financial development. However, the challenge with these works is that they used pseudo measures of financial development such as the ratio of M2 to GDP, the ratio of M1 to M2+, and private sector credit to GDP. Figure 1shows the trend of financial sector development and real GDP growth in Ghana over the study period. The relationship between financial development and growth rate was not between 1984 and 1994. For instance, while financial development fell from 13.68% to 8.54% in 1995, real GDP growth had a slight upsurge from 3.29% in 1994 to 4.11% in 1995. Beyond 1995, both variables remained relatively stable till the year 2003 where financial development experienced a sharp rise from 9.88% to 19.76% in 2004. 0 5 10 15 20 25 0 2 4 6 8 10 12 14 16 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 GDPG FD* Figure 1. Trend of real GDP growth and financial development in Ghana. Source: Authors' Construct, 2019 Peprah et al., Cogent Economics & Finance (2019), 7: 1625107 https://doi.org/10.1080/23322039.2019.1625107 Page 4 of 20 Furthermore, a clear disparity between the two variables can be identified between 2004 and 2015, where the country’s financial sector experienced a relatively stable trend, real GDP growth experienced some fluctuations recording its highest value (14.04%) in 2011. It is evident from the juxtaposition in Figure 1that even though it appears that financial development drives growth, the relationship has not been consistent and thus the effect of financial development of economic growth in Ghana still remains an empirical question. 3.2. The remittances-growth nexus The impact of remittances on economic growth and poverty has been discussed extensively among academics and policymakers (see Gupta, Pattillo, & Wagh, 2009 & Jongwanich, 2007). Per the literature, the study provides a summary of the main channels through which remittances enhance growth in remittance-receiving countries. Fayissa and Nsiah (2008) argued that remittances enhance economic growth in countries where financial systems are not very strong by providing an alternative way to financing investment thereby overcoming liquidity constraints. Iqbal and Abdus (2005) shows that real GDP growth is positively correlated to workers’remittances during 1972–73 to 2002–03 and workers’remittances emerged to be the third important source of capital for economic growth in Pakistan. Adams and Page (2005) also used data on remittances from 71 developing countries to analyse the effect of remittances on inequality and poverty and concluded that remittances reduce the level, depth and severity of poverty in the developing world significantly. Figure 2presents the trend of real GDP growth and remittances for the study period. We realise that both variables showed a relatively stable trend from 1984 to 2006. In the year 2010, remittance recorded a low value of 0.42% while real GDP growth fared well with a value of 7.89. Furthermore, between the period 2010 and 2011, while remittances increased by 5.4%, real GDP growth rose to 14.04%. However, the increase in economic growth was attributed to the rebasing of the economy coupled with additional revenue from commercial exploration of crude oil (Aryeetey & Baah-Boateng, 2015). Beyond 2011, while remittances continued to increase reaching a peak of 13.27% in 2015, growth dipped to 3.9%. 3.3. Joint effect of financial development and remittances on economic growth In a well-functioning financial sector, remittances are supposed to pass through the banking system before getting to the households for spending (Giuliano & Ruiz-Arranz, 2009). This implies that remittances work well through a developed financial system. Thus, the pass through effect of financial sector development and remittances could be higher relative to the individual effects. In spite of the above theoretical argument, the joint effect of financial sector development and remittances on economic growth has not been clear. While some authors believe that remittances affect growth via the financial sector others believe otherwise. For instance, Freund and Spatafora (2008) and Giuliano and Ruiz-Arranz (2009) noted that remittances can affect both investment and 0 2 4 6 8 10 12 14 16 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 GDPG RI Figure 2. Trend of real GDP growth and remittance inflow (%GDP) in Ghana. Source: Authors' Construct, 2019 Peprah et al., Cogent Economics & Finance (2019), 7: 1625107 https://doi.org/10.1080/23322039.2019.1625107 Page 5 of 20 economic growth positively if channelled to projects with higher returns in the presence of wellfunctioning financial markets that tend to reduce transaction costs. Thus, remittances remove credit constraints, improve the allocation of capital and promote economic growth in less financially developed countries. On the contrary, if remittances do not ease liquidity constraints in the financial system or are not used for productive investments, the growth impact of remittances through financial sector channels may be weak as argued Nyamongo et al. (2012). 4. Methodology 4.1. Data description and sources The study uses macrodata spanning 1984 to 2015 for the empirical analysis. Annual data on real GDP growth, gross fixed capital formation (K), population (L), financial development (FD), remittances (RI), external debt (DEBT), and real exchange rate (REER) were obtained from the 2017 edition of the World Development Indicators (WDI). Data on government revenue (GR) was sourced from the International Monetary Fund (IMF) database while financial development was sourced from the Global Financial Development Database of the World Bank. Gross fixed capital formation was used as a proxy for capital. It was captured as the value of acquisitions of new or existing fixed assets (investment) by the government and the private sector as a percentageof GDP (Chowdhury, 2016). Population is defined as the International Labour Organisation’s total population between the ages 15 and 64 expressed as a percentage of total population (Giuliano & Ruiz-Arranz, 2009;Rao&Hassan,2011). Public debt (DEBT) remains one of the major constraint to growth in Ghana due to its sustainability. External debt comprises all forms of aid (debt/liabilities) that require payment(s) of interest and/or principal by the debtor at some point(s) in the future and that are owed to residents of a country as a ratio of GDP (Aggarwal et al., 2011). Financial development (FD) in this study was an index generated by the World Bank group taking into account access, efficiency, depth, and stability of the financial system of a country thus making it a comprehensive measure of financial development. Remittance (RI) also comprises inflow of personal transfers and compensation of employees from abroad measured as a percentage of GDP. Two channels through which remittances spur growth have been identified in the literature, one has to do with the poverty-eradicating power of remittance through access to credit for small and medium scale enterprise establishment, and investment in interest-bearing assets. Financial Development (FD) is widely argued in the literature as being the backbone of SMEs as well as the provision of financial products and services which in turn spur growth. Like financial development, remittance is expected to boost growth (Giuliano & Ruiz-Arranz, 2009;Jongwanich,2007; Nyamongo et al., 2012;Ratha,2013). The study captured real GDP growth as the annual percentage changes in real output (Chowdhury, 2016). Real effective exchange rate is the nominal effective exchange rate divided by a price deflator (Gala, 2007; Rodrik, 2008). Furthermore, Government Revenue (GR) forms the central governments’ability to finance developmental projects from internally generated resources. The variable was captured as a percentage of overall government revenue in a fiscal year to GDP (Afonso & Furceri, 2010; Akai & Sakata, 2002). Lastly, the interaction term for financial development and economic growth (FDRI) has gained popularity in the growth literature lately because of the perceived complementarity of the variables in boosting growth (Giuliano & RuizArranz, 2009; Nyamongo et al., 2012). 4.2. Theoretical and empirical models Following Solow (1956), the study adopts the neoclassical Aggregate Production Function (APF) which expresses the relationship between national output and the volume of inputs used in production. We express the APF as: Yt¼TtKtLt(1) Where Ytis the output, Ttis the Total Factor Productivity, Ktdenotes capital, while Ltdenotes labour. Total Factor Productivity (TtÞcaptures some exogenous factors affecting growth other than labour and capital. Based on theoretical and empirical evidence, the study captures some major drivers of TFP in Ghana as: Peprah et al., Cogent Economics & Finance (2019), 7: 1625107 https://doi.org/10.1080/23322039.2019.1625107 Page 6 of 20 TFPt¼fðGRt;FDt;RIt;FDRIt;DEBTtÞ(2) Linking up equations (1) and (2), we obtain equation (3) Yt¼fK tLtGRtFDtRItFDRItDEBTt ðÞ (3) where RI is remittance, FD is financial development, FDRI is the financial development and remittances interaction, GR is government revenue, DEBT is public debt. K is capital, and L is the labour force. Equation (3) can be modelled in an econometric form as: Ln ¼φþβ1LnKtþβ2LnKtþβ3LnGRtþβ4LnFDtþβ5LnRItþβ6LnFDRItþβ7LnDEBTtþet(4) The logarithmic transformation of equation (4) to take care of the effect outliers and its possible effect on pulling the coefficients yields equation (5) Ln ¼φþβ1LnKtþβ2LnKtþβ3LnGRtþβ4LnFDtþβ5LnRItþβ6LnFDRItþβ7LnDEBTtþet(5) From theory, the study expects that β1,β2,β3,β4,β5,β6>0 while β7<0: 4.3. The model The varying length of maturity dates for investments in financial intermediaries and productivity levels of business born out of remittance receipts means that remittances inflows can have a short-term and long-term impact on growth. The study employed the Autoregressive Distributed Lag technique put forward by Pesaran, Shin, and Smith (2001). The ARDL technique has two highly desirable properties. First, it has been shown to work well in small samples (see Bahmani-Oskooee & Hegerty, 2009;Kwesi Ofori, Obeng, & Armah, 2018). Secondly, it provides short-run estimates, long-run estimates, and a cointegration test within a single Ordinary Least Squares estimate. First, following Pesaran et al. (2001), an expression of the relationship between financial development, remittances and growth of output from equation (5) is expressed in the ARDL form as seen in equation (6) ΔlnYt¼φ0þ;lnYt1þα1lnKt1þα2lnLt1þα3lnGRt1þα4lnFDt1þα5lnRIt1þα6lnFDRIt1 þα7lnDEBTt1þ∑ρ i¼1β1ΔlnYtiþ∑ρ i¼1β2ΔlnKtiþ∑ρ i¼1β3ΔlnLtiþ∑ρ i¼1β4ΔlnGRti þ∑ρ i¼1β5ΔlnFDtiþ∑ρ i¼1β6ΔlnFDtiþ∑ρ i¼1β7ΔlnFDRItiþ∑ρ i¼1β8ΔlnDEBTtiþεt (6) Second, to determine the threshold effect of financial development on growth, we present a second ARDL model capturing the quadratic term of financial development in equation (7). This stem from economic intuition that over a certain level of financial development, growth could be hampered as fast-growing financial systems has the potency of causing a heating-up of the economy. ΔlnYt¼φ0þ;lnYt1þα1lnKt1þα2lnLt1þα3lnRIt1þα4lnFDt1þα5lnFD2 t1þα6lnDEBTt1 þα7lnGRt1þα8lnREERt1þ∑ρ i¼1β1ΔlnYt1þ∑ρ i¼1β2ΔlnKtiþ∑ρ i¼1β3ΔlnLti þ∑ρ i¼1β4ΔlnRItiþ∑ρ i¼1β5ΔlnFDtiþ∑ρ i¼1β4ΔlnFD2 tiþ∑p i¼1β6ΔlnDEBTti þði¼1Þ∑p i¼1β7ΔlnGRðtiÞþ∑p i¼1β6ΔlnREERtiþεt (7) 4.4. Results This section presents the cointegration test, stationarity test as well as the short-term and long-term results. Peprah et al., Cogent Economics & Finance (2019), 7: 1625107 https://doi.org/10.1080/23322039.2019.1625107 Page 7 of 20 4.5. Summary statistics Table 1shows the summary statistics of all the variables. For instance, the average real GDP growth over the study period was 5.54 percent while that of financial development and remittances amounted to 0.14 and 1.35 respectively. 4.6. Test for stationarity The Augmented Dickey-Fuller (ADF) and Phillips Perron (PP) tests with a constant only, and a constant with trend option were used to test the unit root of each. This was done to ensure that none of the variables were integrated of an order above one before applying the ARDL technique. The null hypothesis of unit root for the variables was rejected at various levels of significance as specified in Tables 2and 3using the ADF and PP tests, respectively. Table 1. Summary statistics GDPG L K FD RI GR DEBT REER Mean 5.54 2.62 20.26 0.14 1.35 5.91 64.77 144.54 Median 4.85 2.58 21.54 0.13 0.41 5.15 64.41 107.37 Maximum 14.05 3.44 30.93 0.21 13.27 14.05 129.32 559.52 Minimum 3.30 2.25 6.85 0.09 0.01 3.30 18.11 69.46 Std. Dev. 2.22 0.25 6.37 0.04 2.67 2.41 31.01 99.03 Skewness 2.11 1.37 −0.51 0.22 3.18 1.52 0.33 2.99 Kurtosis 7.94 5.22 2.31 1.37 13.65 5.26 2.34 12.01 J-Bera 56.25 16.58 2.03 3.78 205.27 19.07 1.17 155.86 Probability 0.00 0.00 0.36 0.36 0.00 0.00 0.56 0.00 Sum 177.26 83.73 648.20 4.59 43.17 189.02 2072.55 4625.43 S.S. Dev 153.41 2.04 1257.47 0.06 221.71 180.39 29,816.6 304,003.4 Obs. 32 32 32 32 32 32 32 32 Note: S.S. Dev represents Sum of Square Deviation, Obs. denotes Observation, J-Bera also denotes Jarque Bera and Std. Dev. represents Standard Deviation Table 2. ADF stationarity test Variables Levels First Difference Intercept Intercept+Trend Intercept Intercept+Trend GDPG −3.47** −3.94** −8.04*** −7.87*** K−2.41 −3.04 −9.83*** −17.83*** L−3.75** −3.09 −5.33** −7.99*** FD −1.09 −2.09 −5.98*** −6.11*** RI 7.25 9.62 −4.36** −5.31** GR −2.64* −4.19* −12.04*** −18.38*** DEBT −1.59 −1.84 −4.31** −4.29** REER −12.88*** −25.64*** −11.31*** −8.12*** Note ***, ** and * denotes the rejection of the null hypothesis at 10%, 5% and 1% significance level Peprah et al., Cogent Economics & Finance (2019), 7: 1625107 https://doi.org/10.1080/23322039.2019.1625107 Page 8 of 20 Demirguc-Kunt, A., & Levine, R. E. (2008). Finance financial sector policies, and Long Run Growth in M. Sperce Growth Commission Background paper, No 11 Washington, D. C. World Bank. Elmendorf,D.W.,&Mankiw,N.G.(1999). Government debt. 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A contribution to the theory of economic growth. The Quarterly Journal of Economics,70(1), 65-94. Svirydzenka, K. (2016). Introducing a new broad-based index of financial development. International Monetary Fund. World Bank (2009C). Global Development Finance 2009. Charting a Global Recovery. Retrieved from: http:// econ.worldbank.org/WBSITE/ EXTERNAL/EXTDEC/ EXTDEC PROSPECTS/EXTGDF/ EXTGDF2009/ 0,,menu PK:5924239~pagePK:64168427 ~piPK:64168435 ~theSite PK :5924232,00.html. World Bank (2014). Migration and remittances: Recent developments and outlook. In Migration and development brief (pp. 22). Peprah et al., Cogent Economics & Finance (2019), 7: 1625107 https://doi.org/10.1080/23322039.2019.1625107 Page 15 of 20 APENDICES APPENDIX A Figure A1. Plots of CUSUM and CUSUMSQ for model 2. Table A2. Model diagnostics (ARDL MODEL 2) Test Statistics F-statistics Probability Value Serial Correlation X2 auto F (1.3)3.81,361 0.1459 Functional form X2 Reset F (1,3)2.085455 0.2444 Normality Test X2 Norm Not Applicable 0.6945 Heteroskedasticity X2 BP F (25,4)1.5190 0.3734 Source: Authors' Construct, 2019. Table A1. Bounds test result for co-integration (ARDL MODEL 2) Critical Value 10% Level 5% Level 2.5% Level 1% Level I (0) I (1) I(0) I(1) I(0) I(1) I(0) I(1) K = 8 1.92 2.89 2.17 3.21 2.43 3.51 2.73 3.9 Dependent Variable F-Statistics F(DLGDPG) = F (LN(K), LN(PG),LN(FD),LN(FD2), LN(RI), LN(DEBT)),LN(GR),LN(REER)) 5.8960*** Source: Authors' Construct, 2019. Peprah et al., Cogent Economics & Finance (2019), 7: 1625107 https://doi.org/10.1080/23322039.2019.1625107 Page 16 of 20 APPENDIX B Table B1. Short-run result for the threshold (Model 2) Variable Coefficient Std. Error T-Statistic Prob. DLN(GDP(−1)) 0.7517*** 0.0354 21.2136 0.0000 DLN(K) 0.0839*** 0.0063 13.3213 0.0002 DLN(K(−1)) 0.1885*** 0.0137 13.7622 0.0002 DLN(PG) −0.9759*** 0.0785 −12.4403 0.0002 DLN(PG(−1)) 1.6169*** 0.1236 13.0858 0.0002 DLN(RI) −0.0001 0.0013 −0.0673 0.9496 DLN(RI(−1)) 0.0056* 0.0012 4.4039 0.0117 DLN(FD) −0.4750*** 0.0346 −13.7298 0.0002 DLN(FD(−1)) 0.1253*** 0.0138 9.0503 0.0008 DLN(FD2) 0.4149*** 0.0329 12.6184 0.0002 DLN(FD 1ðÞÞ 2) 0.3346*** 0.0262 12.7814 0.0002 DLN(DEBT) −0.0072*** 0.0005 −14.3386 0.0001 DLN(DEBT(−1)) −0.0003* 0.0005 −4.2606 0.0130 DLN(GR) 0.0529*** 0.0029 17.9727 0.0001 DLN(REER) −0.0061*** 0.0004 −14.3357 0.0001 DLN(REER(−1)) −0.0005** 0.0001 −7.2031 0.0020 ECM 0.6781*** 0.0489 13.8427 0.0002 Note *, ** and *** denotes the rejection of the null hypothesis at 10%, 5% and 1% significance level Figure B1. Plot of CUSUM and CUSUMSQ (Stability test for model 1). Peprah et al., Cogent Economics & Finance (2019), 7: 1625107 https://doi.org/10.1080/23322039.2019.1625107 Page 17 of 20 APPENDIX C Calculation the effect of the interaction between FD and RI and the threshold of FD In this appendix, we demonstrate how the interaction between financial development (FD) and remittances (RI) are calculated. We also show how the turning point or the threshold effect of financial sector development is calculated. 1. Interaction between FD and RI (FDRI) Long-run LN GDPGðÞ¼0:31LN FDðÞþ0:26LN RIðÞþ0:31LN FDRIðÞ dGDPG dRI ¼0:26 þ0:31LN FDðÞ ¼0:26 þ0:31 0:14ðÞ ¼0:26 þ0:04 ¼0:3% Thus, the joint effect of FD and RI on economic growth is estimated at 0.3%. Testing for the significance of the Interaction H0:FDRI = 0 F(1, 24) = 4.85 Prob > F = 0.0375** Short-run For FDRI: LN GDPGðÞ¼0:10LN FDðÞþ0:41LN RIðÞþ0:84LN FDRIðÞ dGDPG dRI ¼0:41 0:84 LN FDðÞ ¼0:41 0:84 0:14ðÞ ¼0:41 0:12 ¼0:53% For FDRIt1 LN GDPGðÞ¼0:10LN FDðÞþ0:41LN RIðÞþ0:45LN FDRIðÞ dGDPG dRI ¼0:41 þ0:45 LN FDðÞ ¼0:41 þ0:45 0:14ðÞ Peprah et al., Cogent Economics & Finance (2019), 7: 1625107 https://doi.org/10.1080/23322039.2019.1625107 Page 18 of 20 ¼0:41 þ0:07 ¼0:34% 2. Threshold Effect for Financial Development LN GDPGðÞ¼B0þ1:34LN FDðÞþ0:96LN FD2  (1) First Order Condition: dGDPG dFD ¼1:34 þ20:97ðÞLN FDðÞ (2) ¼1:34 þ1:93LN FDðÞ 1:34 ¼1:93LN FDðÞ 1:34 1:93 ¼LN FDðÞ LN FDðÞ¼0:70. This implies that any expansion of the financial sector beyond 70% may contribute decline in economic growth. Testing for the significance of the Coefficient H0:FD = 0 F(1, 24) = 11.94 Prob > F = 0.0021*** Second Order Condition: dGDPG dFD ¼1:34 þ20:97ðÞLN FDðÞ dGDPG dFD2¼20:97ðÞ<0 (3) ¼1:94% Peprah et al., Cogent Economics & Finance (2019), 7: 1625107 https://doi.org/10.1080/23322039.2019.1625107 Page 19 of 20 © 2019 The Author(s). This open access article is distributed undera Creative Commons Attribution (CC-BY) 4.0 license. You are free to: Share —copy and redistribute the material in any medium or format. Adapt —remix, transform, and build upon the material for any purpose, even commercially. The licensor cannot revoke these freedoms as long as you follow the license terms. Under the following terms: Attribution —You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use. 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