Dynamic threshold effects of financial development on international trade: evidence from Sub-Saharan Africa

Abstract

This study assesses the optimal threshold at which financial development affects international trade in Sub-Saharan Africa. The study utilised the dynamic threshold technique developed by Seo et al. (Stata J 19(3):685-697, 2019) on annual panel data spanning 1980 to 2022 for 38 SSA countries. The study revealed that trade intensity is expected to increase by 1.416% significantly before financial development exceeds the threshold of 0.092% within the region. Also, trade volume is expected to improve by 0.743% if financial development surpasses the threshold of 0.081%. This implies that that trade intensity will increase significantly as financial development grows, but only until it reaches a threshold of 0.092%, after which the effect may taper off. Similarly, trade volume is expected to improve if financial development surpasses a threshold of 0.081%, highlighting the importance of carefully calibrated financial policies to maximize both trade intensity and volume within the region. Therefore, the study recommends that policymakers in sub-Saharan Africa focus on improving financial inclusion and infrastructure to enhance trade intensity and volume while diversifying trade partnerships to reduce dependency on limited markets. Additionally, long-term strategies should address the risks of excessive financialization through regulatory frameworks to ensure financial development continues to positively impact trade without causing economic instability.