exploiting the location of migrants.

We also extend the literature concerning the connection between remittances and financial development (Aggarwal et al., 2011; Demirg ̈uc ̧-Kunt et al., 2011; Ambrosius and Cuecuecha, 2016; Fromentin, 2018; Uddin et al., 2022).<sup>5</sup> Using an event study approach, we find the elasticity between distance and transaction bank accounts became negative during the early COVID-19 period. This supports the hypothesis that a larger increase in formal remittances in areas near a border crossing consequently produced more bank accounts in those regions.

# **2 Remittances during COVID-19 and the role of distance**

As a result of the implementation of COVID-19 lockdown measures in the United States, international and financial organizations predicted a significant decline in remittances to Mexico.<sup>6</sup> In fact, household surveys conducted by phone in Latin America show that on average, 64 percent of households that typically received remittances reported a decline in inflows from May through June 2020.<sup>7</sup> In the case of Mexico, this figure was 36.5 percent; 46 percent reported no changes, and only 17 percent reported an increase. Nevertheless, formal remittances to Mexico experienced record growth in every month of our period of analysis since the start of the pandemic even though unemployment among Mexican workers in the United States rocketed during the same period, as shown in panel A of Figure 1.<sup>8</sup> Several hypotheses have attempted to explain this phenomenon, including the role of the large US fiscal stimulus package and the heightened incentives of migrants to help relatives in Mexico who were affected by the crisis. Others have proposed a sudden acceleration in the formalization of remittances during COVID-19 as a potential explanation. Mexico’s proximity to its diaspora provides a good setting to examine the last hypothesis.

Without mobility restrictions, the cost of sending remittances informally would typically increase with the cost of travel and physical distance between senders and recipients. Therefore, one would expect Mexican municipalities closer to the US border to have greater networks of migrants living in southern US states and to receive a higher share of informal remittances. We test this assumption as follows. First, we show that before the pandemic there was a negative association between total (formal and informal) remittances and distance that was 50 percent higher than the negative association between formal remittances

> 5Moreover, this paper contributes to recent policy analyses that support the relevance of digital technologies and financial inclusion in the post-pandemic era (Pandey et al., 2020; Ozili, 2020; Mughal et al., 2021).

> 6World Bank (2020) predicted a 19.3 percent decline in remittances to Latin America and the Caribbean, where Mexico is the largest recipient. Private financial institutions also estimated significant declines. See, e.g., El Financiero (2020); El Economista (2020); Reuters (2020).

> 7See Table A1 in the Appendix.

> 8A steady increase in remittances to Mexico over the last 20 years has been documented, with some arguing that the gain between 1996 and 2003 emerged from a shift from informal to formal channels (Hern ́andez-Coss, 2005).

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