The long-run relationship between remittances and household consumption: evidence from Lesotho

Abstract

AbstractThe study examines the long-run relationship between remittances and household consumption in Lesotho for the period 1991-2019 using the Johansen cointegration technique and the Engle-Granger Residual Approach. Despite remittances in Lesotho representing over 20% of GDP which is highly significant relative to other African countries, a long-run relationship between remittances and household consumption has not been conclusively established in prior literature. The results of this study, however, confirms a significant positive long-run equilibrium relationship between household consumption, remittances and GNI per capita. According to the results, there exist a negative but insignificant relationship between household consumption and real interest rate. However, in the short-run, remittances negatively affect household consumption. This implies that increase in remittances in Lesotho reduce household consumption initially. A possible explanation is the existence of household consumption adjustment phase when remittances are first received. This means that in the short-run consumption is mostly financed from other income sources which may be informal, as the case with many developing countries. However, in the long run this pattern subsides.