This study examines the relationship between remittance inflows and its macroeconomic dynamics (inflation, exchange rate, and domestic interest rate on savings) in the presence of potential break, using annual time series data (1995–2020). The Gregory Hansen co-integration tests (presence of a single break) and the error correction model were run after the Zivot and Andrews unit root tests. The findings of the study show that when there was a major break, remittance inflows tended to have a long-term relationship, and the short-run disequilibrium was corrected to stabilize towards the long-run equilibrium with an annual rate of 60.1 percent. The breakpoint was substantial and had a long-term negative effect on remittance inflows, and the exchange rate appeared to augment with the specific break and tended to impact the remittance inflows. These results suggest that the Government of Nepal should be cautious to assess policy changes (possible structural changes) and to adopt a strategy for handling remittances precisely, not only to increase foreign reserves but also to create a valuable effect of remittance to increase production and thereby producing employment and output.
Keywords: remittance, Gregory Hansen, Zivot Andrews, long run, structural changes
JEL Classification: F24, C22, C22, O41, E32
