best of our knowledge, the existing studies either disregard this issue, or deal with it relying on lagged values or other internal instruments. However, such a strategy is not likely to fully solve the problem. Finding good instruments in a cross-country dataset is challenging, since one needs a variable which is related to economic conditions in the recipient country, but not to remittances (Arezki and Brückner, 2012). The structure of our dataset makes it possible to circumvent this problem: considering only remittances from Italian provinces, rather than aggregate remittance inflows, significantly attenuates the endogeneity of the recipient country’s business cycle.

Third, we investigate the relationship between remittances and financial development in the remittance _source_ economy. The literature has generally focused on financial development in the recipient country, finding that remittances promote financial development (Gupta _et al._ , 2009) and that financial development enhances the impact of remittances on growth (Giuliano and RuizArranz, 2009; Bettin and Zazzaro, 2012). In contrast, we exploit the cross-sectional dimension of the bilateral dataset to test whether the degree of development and the _functional_ proximity of source-province credit markets to local economies play a role in fostering remittances.

We find that remittances from Italian provinces are negatively correlated with the business cycle in recipient countries, and increase especially strongly in response to adverse exogenous shocks, such as natural disasters or large declines in the terms of trade. In addition, remittances are positively correlated with potential GDP in recipient countries. These results are consistent with remittances being driven by both altruism and investment motives.

Remittances are also positively correlated with economic conditions in the source province. Nevertheless, in the presence of similar negative shocks to both source and recipient economies, remittances remain countercyclical with respect to the recipient country.

Financial development in the source province is positively associated with remittances, likely because it reduces transaction costs and eases access to financial services for migrants. Conversely, financial development in the recipient country is negatively associated with remittances, suggesting that remittances help alleviate credit constraints.

The paper is structured as follows. Section 2 offers a detailed review of the existing literature on the macroeconomic determinants of remittances. Section 3 describes the data and the estimated model. Section 4 presents selected statistics about remittances outflows from Italian provinces to developing countries. Section 5 discusses the empirical results.

# **2 The determinants of migrants’ remittances**

## **2.1 The cyclicality of remittances**

There exists a large literature on the determinants of migrants’ remittances.<sup>3</sup> The empirical evidence so far, however, remains inconclusive as to how remittances react to business cycles in the migrants’ home country, and whether they help mitigate economic hardship. At the microeconomic level, some studies find that remittances increase to compensate relatives for negative shocks to

> 3Rapoport and Docquier (2006) provide an exhaustive review of modern theoretical and empirical literature on remittances.

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