Financial globalization and macroeconomic volatility in Sub-Saharan African countries: do economic and political institutions matter?

James Temitope Dada, Ezekiel Olamide Abanikanda, Mosab I. Tabash, Samrat Ray and Mamdouh Abdulaziz Saleh Al-Faryan

Journal of Financial Economic Policy, 2025, vol. 18, issue 1, 64-85

Abstract: PurposeThis study aims to investigate the effect of financial globalization and economic and political institutions on macroeconomic volatility in the Sub-Saharan Africa (SSA). In addition, the study examines the absorptive capacity of economic and political institutions in the link between financial globalization and macroeconomic volatility.Design/methodology/approachThis study extracted data from twenty-seven SSA countries between 1991 and 2021. The study applies cross-sectional dependency tests, second-generation unit root tests and Driscoll and Kraay (1998) panel spatial correlation consistent (PSCC) standard errors to drive out the study’s conclusion.FindingsThe result suggests that financial globalization significantly contributes to macroeconomic volatility in the direct model, whereas its indirect effect rests largely on the indicators of economic and political institutions. For economic and political institutions, bureaucratic quality, democratic accountability and government stability negatively influence macroeconomic volatility. However, the effect of corruption control and law and order is insignificant. The interactive term of financial globalization and institutions shows that financial globalization interacted with democratic accountability, government stability and law and order, negatively affect macroeconomic volatility. On the other hand, the interactive effect of financial globalization with bureaucratic quality is significantly positive, whereas the interactive impact of financial globalization with corruption control is not significant. The net effect reveals that bureaucratic quality, democratic accountability, government stability and law and order moderate the positive effect of financial globalization on macroeconomic volatility in the region.Practical implicationsThis study recommends the need to strengthen the economic and political institutions and develop the financial sector to cushion the effect of financial globalization on macroeconomic volatility.Originality/valueThis study adds to the body of knowledge by unearthing the moderating effect of economic and political institutions in the linkages between financial globalization and macroeconomic volatility, especially in SSA.

Keywords: Financial globalization; Macroeconomic volatility; Economic institution; Political institution; SSA (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-12-2024-0386

DOI: 10.1108/JFEP-12-2024-0386

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