Financial Integration, Trade Integration, Macroeconomic Volatility and Economic Growth in the East African Community

Abstract

This study sought to investigate the influence of macroeconomic volatility and trade integration on the relationship between financial integration and economic growth in the EAC member states. Specifically, the study aimed at determining the: relationship between financial integration and economic growth in the EAC; moderating effect of macro-economic volatility on the relationship between financial integration and economic growth in the EAC; intervening effect of trade integration on the relationship between financial integration and economic growth in the EAC and finally, the joint effect of financial integration, trade integration, macro-economic volatility on economic growth in the EAC. To achieve these specific objectives, four hypotheses were developed, including: There is no significant effect of Financial integration on economic growth; there is no significant moderating effect of macro-economic volatility on the relationship between financial integration and economic growth; there is no significant intervening effect of trade integration on the relationship between financial integration and economic growth; and lastly, there is no significant joint effect of financial integration, macroeconomic volatility and trade integration on economic growth. The study adopted a positivistic research philosophy and casual research design. Diagnostic tests were carried out to meet the requirements for conducting correlation and regression analysis on panel data. These include; Multicollinearity tests, Im- Pesaran-Shit Test (IPS) panel unit root test and Hausman test for fixed effects and random effects models. Descriptive statistics such as the mean, standard deviation, coefficient of variation as well as correlation analysis were conducted as the preliminary statistical analysis. Generalized-two stage least squares instrumental variable regression model (G2SLSIV) was then conducted to test the hypotheses. The findings of the study showed that: macro- economic volatility does not have a significant moderating effect on the relationship between financial integration and economic growth; there is no significant intervening effect of trade integration on the relationship between financial integration and economic growth. Overall, financial integration, macroeconomic volatility and trade integration do not have a joint effect on economic growth. These findings contribute to knowledge in the sense that, the positive and significant correlation between financial integration and economic growth confirms that, an increase in gross capital flows is accompanied by increase in economic growth. It also contributes to knowledge by revealing that, financial deepening contributes positively to financial integration which further contributes to accelerating economic growth. Therefore, the study is useful to the governments of respective member states in formulating policies aimed at achieving macro-economic stability, similarity in economic structures and ensuring the quality of institutions. The study culminates with acknowledging the limitations encountered and provides suggestions for further research.