Remittances and the Use of Formal and Informal Financial Services.

Summary While recent literature has pointed to a positive effect of migrants’ remittances on the financial development of receiving countries, findings with respect to access to and the use of loans have been ambiguous. This paper investigates the effect of remittances on the use of formal and informal financial services using Mexican household data and finds positive and statistically significant effects of remittances on the ownership of savings accounts, the existence of debts, and on recent borrowing. The fact that the effect of remittances on borrowing is driven by informal finance rather than by traditional bank loans points to deficiencies of the formal financial sector in addressing the financial needs of remittance-receiving households. We address methodological concerns of selection bias and reverse causality through household fixed effects and an instrumental strategy that exploits distance to train lines and labor market conditions in the US as exogenous determinants of remittances. [ABSTRACT FROM AUTHOR]