Non‐linear relationship between remittances and financial development in Jamaica.

We examine the relationship between financial development and remittance inflows (remittances), measured as a share of GDP, within a non‐linear framework in Jamaica over the period 1980 to 2017. By applying the autoregressive distributed lag bound testing approach to cointegration, we arrive at two key results. First, there is a long‐run cointegrating relationship running from remittances to financial development. Second, remittances and financial development are non‐linearly related. Financial development is a U‐shaped function of remittances. As remittances increase, they first have a negative impact on financial development. However, after remittances reach a threshold point, their impact on financial development is positive. Taken together, the results indicate that remittances first substitute for and then complement financial development. We provide important policy suggestions such as those that would increase remittances and those that would incentivize remittance receiving households to use these inflows in the formal financial sector. [ABSTRACT FROM AUTHOR]