Differential impacts of foreign capital and remittance inflows on domestic savings in developing countries: A dynamic heterogeneous panel analysis

The study examines the role of foreign capital and remittance inflows in the domestic savings of 63 developing countries for 1971-2010, paying attention to likely differential effects of FDI, portfolio investment, foreign aid and remittances. The conventional homogeneous panel estimates suggest that foreign aid and remittance flows have a significant negative impact on domestic savings. However, these techniques ignore cross-section dependence and parameter heterogeneity properties and hence yield biased and inconsistent estimates. When we allow for parameter heterogeneity and cross-sectional dependence by employing Pesaran's Common Correlated Effects Mean Group estimator technique, only remittances crowd out savings.