How Do Trade Openness and Financial Integration Affect Growth and Output Volatility

Abstract

This study is motivated by the fact that even though many African countries have witnessed rapid growth, they have also experienced high volatility in the form of severe financial crises, especially in the last two decades. These developments naturally lead to the issue of whether, in a more integrated global economy, the relationship between growth and output volatility has changed. The phenomena have also raised questions on whether the growth–output volatility relationship can be linked to the growing pains seemingly associated with rising trade and financial integration. This chapter attempts to provide answer to these questions by providing insights on how trade and financial integration affect the relationship between growth and output volatility using data from selected Africa countries. The study explores in detail the relationship between growth and the volatility of output components (consumption and investment). Our main result is that there is a positive growth and output volatility impact of trade openness and integration with the international financial market. The relationship between growth and financial integration and investment volatility is stronger in the long run than in the short run, while the consumption volatility impact of trade openness is higher in the long run than in the short run, suggesting that countries that are more open to trade appear to face less severe trade-off between growth and volatility.