Investigating Macroeconomic Shocks Transmission in African Countries

Abstract

The recent events on the global scene have pointed once again to the importance of the increasing level of interdependence among markets. Economic volatility in one or several countries is easily transmitted to neighbours and even beyond. Consequently, national economic issues need to be considered from a regional/global perspective. Therefore, this paper seeks to investigate the extent of macroeconomic shocks transmission among eight leading African countries selected on the basis of the size of the economy and regional distribution. This is critical to give further assessment of economic integration efforts in the continent and also reveal the pattern of macroeconomic reactions to continental shocks among African countries especially on the aftermath of commodities and crude oil prices shocks and other unobserved factors including diffusion of technological progress. To achieve this objective, we employed Global Vector Auto regression (GVAR) using data from 1990 to 2016 to examine the extent of shocks transmission of Real GDP among these countries. Also, we introduced data from important trading partners from developed and developing countries as expected in a standard GVAR model. The GVAR method is very appropriate in this context as it combines individual country-specific models in which variables are related to country-specific foreign variable in a consistent manner. This method is preferred to others in the literature as it allows us to address the curse of dimensionality problem. The results show evidence of macroeconomic shocks transmission among African countries including the North African countries and Sub-African countries. However, the results further indicate that African countries are largely influenced by external shocks rather than shocks from the African region.