Abstract:
This paper studies how remittance inflows affect informality in Latin America and the Caribbean using annual data for 22 countries over 2000–2020. System-GMM estimates show that remittances are positively associated with informality when measured with output-based shadow economy indices derived from Multiple Indicators and Multiple Causes and Dynamic General Equilibrium approaches. By contrast, this relation is weaker for labor market proxies such as self-employment rate and informal employment share. System-GMM interaction estimates indicate that greater financial freedom attenuates the positive remittance–informality association, consistent with stronger financial systems channeling remittances toward the formal economy. Panel Smooth Transition Regression estimates reveal that the positive remittance–informality association is concentrated in low-financial access regimes and turns negative once financial institutions access crosses the estimated threshold. Overall, remittances are more likely to coincide with informality where financial inclusion is weak, suggesting that policies targeting financial outreach and inclusion can increase the formalization payoff of remittance inflows.
