Do Trade Liberalisation and Financial Development Affect Macroeconomic Volatility? Evidence from Africa

Abstract

The study investigates the effect of financial development and trade liberalisation on macroeconomic volatility in Africa between 1980 and 2017. The study employed panel data, de jure and de facto measures of financial openness and three estimation techniques (pooled Ordinary least square method [OLS], fixed effect and dynamic general method of moment [GMM]) to analyse the data. Results show that increased financial openness also leads to increased income volatility for the de jure measure of financial openness while for the de facto measure increased financial openness reduces income volatility. Results also show that financial openness leads to subtle volatility of output growth in Africa. The results contradict the argument that more financial openness leads to lower volatility in consumption in Africa. Furthermore, investment volatility responded to the measures of financial openness in different ways. The study conclude policymakers should focus more on policies that will foster financial system development as it has shown to be very effective in reducing macroeconomic volatility in Africa.