International financial integration, financial development and economic growth in Africa
the robust direct growth effects of financial integration (i.e., financial openness), especially in Africa. Thus, this paper examines whether (and to what degree) the African economies have a certain threshold level of financial development that they need to attain before the indirect growth benefits of international financial integration can be derived.
First, this paper uses a cross-country panel of macroeconomic annual data for 15 African countries in 1980-2014 to estimate the direct effect of international financial integration on economic growth with the generalized method of moments procedure followed by Arellano and Bond (Review of Economic Studies, 1991). Inflation rates and government deficits are used as control variables. The lagged gross domestic product per capita growth and the crisis dummy variable are also included for the dynamic model specification with structural changes. As international financial integration variables, the foreign direct investment and portfolio investment inflows are used.
Second, to estimate the indirect effect of international financial integration on economic growth, this paper uses the slope dummy variable "degree of financial development", which enables clarification of the existence of threshold effects. As financial development variables, this paper uses the domestic credit provided by banks and the market capitalization to compare the roles of the banking sector and stock markets.
Finally, the results suggest that African financial development can enhance the growth effects of international financial integration.