The Effect of Remittances on Consumption and Investment in the Philippines

Purpose – Remittances have long been contributing to the Gross Domestic Product (GDP) of most countries, especially, the Philippines. Numerous studies examined the channeling of remittances on consumption and investment but to which impact is bigger is still an ongoing debate. This paper aimed to identify which channel the Philippines uses its international remittances. Is it for consumption or investment? Design/Methodology/Approach – This study employed vector auto regression in generating the dynamic effects of each variable involved and forecasting its respective behavior using data extracted from the Philippine Statistics Authority (PSA) and Bangko Sentral ng Pilipinas (BSP) from 1998 to 2018. Apart from the regression stage, Impluse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) were utilized for better interpretation of the respective variables’ relevance and forecasts. Findings – By extracting the impulse response function through the vector auto regression analysis, Philippine international remittances were found to be positively spent on the consumption channel. However, based on the result of the forecast-error variance decomposition, it suggests that remittances are more relevant on the investment channel, especially, for future periods. Research Implications – Despite the increase in aggregate investment of the Philippines, international remittances have not been spent productively in the investment channel and have been largely spent on consumption. The result also displays that remittances were forecasted to have great potential in investment growth, especially, for future periods. In this regard, the country should further enrich the financial environment either in financial institutions or financial markets to motivate remittance-recipient families to use some of their remittances for investment purposes and not only for consumption.