Ahmed, Abdullahi D and Suardi, Sandy (2009) Do Financial and Trade Liberalisation Cause Macroeconomic Volatility in Sub-Saharan Africa? Working Paper. Victoria University, Melbourne, Australia.

Abstract

This paper examines the effects of both financial and trade liberalisations on real output and consumption growth volatility in Africa. Having controlled for economic and financial development, institutional quality and other sources of macroeconomic instability, we find robust evidence that trade liberalisation is associated with higher output and consumption growth volatility. In contrast, financial liberalisation is observed to increase the efficacy of consumption smoothing and stabilise income and consumption growth. We also demonstrate that the volatility in output and consumption growth caused by trade liberalisation is negatively associated with the depth of the financial market. Moreover, there is evidence that good institutions help reduce inflation levels and volatility, which in turn promote lower growth volatility.

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