Trade openness and economic growth volatility: An empirical investigation

Abstract

This paper investigated the impact of trade openness on economic growth volatility of Ghana from 1970 to 2013, using cointegration and error correction techniques. Our findings show that both the long and short run economic growth volatility is positively influenced by changes in trade openness. Volatility in domestic credit to private sector, shocks after the economic liberalization and financial openness contributed negative to economic growth volatility in the short run. The major policy implication of our paper is that developing economies should take into consideration their own realities in their trade policies to limit economic growth volatility.

Keywords:

• Ghana
• trade openness
• economic growth volatility
• ARDL cointegration

Public Interest Statement

The extent to which a developing country trades (imports and exports) with the rest of the world may increase or decrease the uncertainty in its economic growth. However, in Ghana, it is not yet known whether trade amplifies or curtails economic growth uncertainty. This study used world Development data (1970–2013) to find out the relationship between trade and economic growth uncertainty in Ghana. The results show that more trade in Ghana increases the uncertainty in economic growth in both the short run (within a year) and the long run (beyond a year). Hence, Ghana should promote policies that would promote the technical knowledge and skills of manufacturing imported goods and incentives to increase export so as to promote economic growth and facilitate the fight against poverty.

Notes

1. We employ HP filter to decompose the real GDP and domestic credit to private sector into their cyclical and permanent components. The cyclical component is then used as the volatility indicator for the analysis. Cariolle and Goujon (2015) provides advantages for the use of HP filter in measuring volatility.

2. KAOPEN refers to the intensity of capital controls. KAOPEN is based on the binary dummy variable that codify the tabulation of restrictions on cross-border financial transactions reported in the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (see Chinn & Ito, 2008; Ito, 2006).

3. The ARDL framework does not impose strict exogeneity assumptions and allows the inclusion of regressors with stationarity and non-stationarity or fractionally distributed properties. Comparative to the conventional cointegration techniques, the ARDL is applicable in estimating cointegration with small sample size.

Additional information

Notes on contributors

Kwame Mireku

Kwame Mireku is an accounting and finance lecturer. Mireku’s research interests include Financial Literacy, SME Financing, Economic Growth and Financial Stability, Stock market dynamics, Behavioral Finance amongst others.

Ellen Animah Agyei

Ellen Animah Boadi is currently a postgraduate student. Boadi’s research interests include trade openness, financial literacy, governance and behavioural finance.

Daniel Domeher

Daniel Domeher is a banking and finance lecturer. Domeher’s research interest includes Real Estate Financing in the Developing World, Property Rights Economics, Financial Innovations, Risk Management, Economic Growth and Poverty Reduction amongst others.

Since economic growth has rippling effect on the Ghanaian economy and we have interest in conducting research into how the economic growth of Ghana can be improved we came together to conduct this study. Ellen has been researching on trade openness for some time now so it was quite fascinating to link this area to economic growth. Base on our research interest, we want to explore further by looking at financial stability, financial innovations and economic growth.