Financial Integration and Growth Correlation in Sub-Saharan Africa

Abstract

This paper studies the relationship between financial integration and the correlation of GDP growth in sub-Saharan African countries. The dynamic nature of financial integration is first emphasized in order to account for both effects of risk sharing on the one hand and intermediation margins and bank rates of return on the other hand. In addition to considering simple variables of growth correlation, we exploit the multiple dimensions of business cycle synchronization first by allowing for asymmetric dynamics during expansion and recession, and by further acknowledging the importance of de-synchronized fluctuations to allow for the costs and benefits of financial integration for an individual country. Our main results are threefold. First, it seems that the financial integration variables are not informative about the likelihood of observing co-movements between the recession phases (after controlling for different variables influencing the business cycle). Secondly, our estimates portray a situation in which both risk-sharing and the convergence of price-based indicators lead to economic specialization rather than to a convergence of the expansion phases. Thirdly, the price-based indicators provide better information than risk-sharing variables to account for business cycle synchronization.

Keywords: Financial integration, Business cycle correlation, Sub-Saharan Africa

JEL Classification: F36, G21, O16