The Effect of Income and Financial Integration on Consumption Smoothing in Africa. Does Income Asymmetry Matter?

Abstract

"In today's increasingly interconnected global economy, understanding the mechanisms that influence consumption smoothing has become crucial for policymakers and economists alike. In this study, the effect of income, income asymmetry and financial integration on consumption smoothing in Africa was estimated. The study covers the period 1985-2020 using panel data on 10 countries. Estimation is done using the Dynamic Common Correlated Effects (DCCE) estimation technique. It is shown that asymmetry existed in the short run given the significance of Wald test for asymmetry (P<0.05). Furthermore, positive income asymmetry (β= - 0.7365, z= -2.47), and negative income asymmetry (β= 0.8541, z=2.66), exerts statistically significant effects on consumption smoothing. In the long run, positive income asymmetry (β=3.2595, z=2.17) has significant effect on consumption smoothing. Results from the equation with income asymmetry interacted with financial integration indicates that in the short run, positive income asymmetry (β= -3.7772, z= -2.17), and its interaction with financial integration (β= -3.8545, z= -2.06) exerts significant effects on consumption smoothing. The study recommends that governments could consider implementing regulations and controls on international financial flows to limit the impact of external shocks, howbeit with caution, given the consumption smoothing reducing effect of the interaction of positive income asymmetry and financial integration. "