During past two decades or so, inward remittances have emerged as a significant source of financial inflows to many developing countries. However, the impact of remittances on long-term economic development remains a debatable issue. The findings of the existing studies remain inconclusive because of limited country coverage, omitted variable bias, failure to take account of possible dynamic nature of the postulated relationship and other methodical limitations.

This paper aims to contribute to the existing literature by utilising the newly constructed panel dataset on remittances covering most of the remittance receiving countries in the world over the period 1976-2005. The specifications of the growth equation and the econometric methodology of the paper systematically draw on the recent development in the empirical growth literature with a view to overcoming the limitations of the existing studies. These results suggest that remittances have a decreasing return relationship with economic growth, that is, the magnitude of the positive impact of remittances tend to diminish with the increase in the degree of remittance dependence (measured by the remittance to GDP ratio) of recipient countries. The estimated inflection point of the remittance to GDP ratio relating to this relationship is between 10 to 15 per cent.