Understanding The Influence of Remittances on Household Consumption and Investment Trends in Pakistan

Abstract

The effect of remittance inflows on Pakistan's economy, in relation to household consumption and investment behavior, is the subject matter of this research. With monthly observations starting from 2005, data from the World Bank is used in this analysis, where a Vector Autoregression (VAR) model in R Studio is employed to explore the remittances-GDP growth-investment consumption-CPI relationship. The impulse response function enables short-run responses to shocks in remittances to be depicted, and the variance decomposition calculates the proportion of variations in reference economic indicators due to remittances. The results validate that remittances have a critical, if transitory, function to fulfill in stimulating GDP growth, triggering investment, and enhancing domestic consumption in Pakistan. Of note is that their temporary effect on inflation (on the CPI basis) is mildly adverse but fleeting. The most probable reason is that the initial boost in investment and spending temporarily relieves pressures on the price's downward movement while this effect recedes subsequently. This research provides crucial insights to policymakers and planners of the economy, emphasizing the importance of developing well informed policy responses that capitalize on remittance development potential to its fullest. It thus contributes fresh perspectives to ongoing academic discussions regarding remittance-fostered economic change in developing nations such as Pakistan and bridges significant gaps in literature.