Diaspora remittances and monetary dynamics: Short-term costs vs long-term gains

Purpose This paper aims to investigate the impact of diaspora remittances on Nigeria’s monetary dynamics amid domestic capital constraints. It specifically examines how remittance inflows affect key financial indicators, producing potentially contrasting short- and long-run effects, particularly through changes in liquidity and credit availability, as well as unintended inflationary pressures. Design/methodology/approach This paper uses linear and nonlinear Autoregressive Distributed Lag (ARDL) models on annual data spanning 1980–2023. The use of these models enables a detailed analysis of the effects of diaspora remittances on two financial development indicators: credit to the private sector and broad money supply. This approach allows for a clear differentiation between long-run equilibrium relationships and short-run dynamic adjustments resulting from remittance inflows. Findings The empirical results confirm an evident temporal and asymmetric duality in the financial development-remittance nexus. Firstly, in the long run, remittance inflows exhibit a significant positive relationship with both private-sector credit and the broad money supply, confirming their role in financial deepening. However, the short-run dynamics reveal a more complex picture: positive shocks to remittances contemporaneously constrain private credit and money supply, suggesting initial frictions in financial intermediation. Furthermore, the analysis shows significant asymmetry: the effects of rising and falling remittance flows are not mirror images, and adverse shocks also exhibit distinct lagged detrimental impacts. This indicates that the monetary system reacts differently to the acceleration vs the deceleration of remittance inflows. Originality/value This paper complements the existing literature by providing empirical evidence on the asymmetric and temporal effects of remittances on Nigeria’s monetary dynamics. It highlights the dual nature of remittance impacts on Nigeria’s monetary policy, indicating how short-run shocks can diverge significantly from long-run benefits. It emphasises the need for synchronised monetary policy measures that mitigate short-run disruptions while leveraging the long-run advantages of remittance inflows.