The Impact of Remittances on the Informal Economy in Latin America: A Dynamic Nonlinear Analysis

The Impact of Remittances on the Informal Economy in Latin America: A Dynamic Nonlinear Analysis | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article The Impact of Remittances on the Informal Economy in Latin America: A Dynamic Nonlinear Analysis Erika Roxana Ehberger This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-8989059/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version 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. The relationship exhibits nonlinear characteristics. Panel Smooth Transition Regression models identify statistically significant threshold behavior, with financial institutional access driving the regime switch in the remittance effect on the informal economy. In particular, the positive remittance--informality association is concentrated in low-financial outreach regimes and turns negative once access crosses the estimated threshold. Overall, remittances are more likely to coincide with informality where financial inclusion is weak, implying that economic policies targeting financial infrastructure and inclusion can increase the formalization payoff of remittance inflows, particularly in countries below the identified threshold. JEL Classification: F24 , O17 , C33 , O54 , E26 , C26 Remittances Informal economy Latin America System-GMM PSTR Full Text Additional Declarations No competing interests reported. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. 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Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-8989059","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":600578425,"identity":"d53412e8-eb1b-49de-8e6b-1e14edbbb8ab","order_by":0,"name":"Erika Roxana Ehberger","email":"data:image/png;base64,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","orcid":"","institution":"University of Duisburg-Essen","correspondingAuthor":true,"prefix":"","firstName":"Erika","middleName":"Roxana","lastName":"Ehberger","suffix":""}],"badges":[],"createdAt":"2026-02-27 14:23:42","currentVersionCode":1,"declarations":"","doi":"10.21203/rs.3.rs-8989059/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-8989059/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":104403246,"identity":"577abc4f-6c71-4ae7-83d2-dcbd532160cf","added_by":"auto","created_at":"2026-03-11 12:17:50","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":1027566,"visible":true,"origin":"","legend":"","description":"","filename":"TheImpactofRemittancesonLACADynamicNonlinearAnalysis2.pdf","url":"https://assets-eu.researchsquare.com/files/rs-8989059/v1_covered_9188a46b-3f55-4b1e-b72d-e153478fb05f.pdf"}],"financialInterests":"No competing interests reported.","formattedTitle":"The Impact of Remittances on the Informal Economy in Latin America: A Dynamic Nonlinear Analysis","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":false,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":true,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"Remittances, Informal economy, Latin America, System-GMM, PSTR","lastPublishedDoi":"10.21203/rs.3.rs-8989059/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-8989059/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eThis 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. The relationship exhibits nonlinear characteristics. Panel Smooth Transition Regression models identify statistically significant threshold behavior, with financial institutional access driving the regime switch in the remittance effect on the informal economy. 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