Financial sector development and macroeconomic volatility: Case of the Southern African Development Community region

Abstract

The study examines the effect of financial sector development on macroeconomic volatility in the Southern African Development Community (SADC) region for the period 1980–2018 employing the Cross-Sectionally Augmented Autoregressive Distributed Lag (CS-ARDL) model. The empirical findings show that banking variables have a negative and significant effect on growth volatility in the SADC countries. Also, stock market capitalisation, which is a measure of capital market development, was also found to have a negative effect on macroeconomic volatility when looking at the whole financial sector. The results suggest that a well-developed capital market where both the stock market and banking sector are thriving mitigates macroeconomic volatility. The empirical results however reveal that when the stock market is dominant, there is bound to be macroeconomic volatility. The results imply that pursuing the development of the overall financial system reduces macroeconomic volatility in a country as well as the region. Authorities should therefore ensure that policies geared towards development of the entire financial system are pursued.

Keywords:

• Macroeconomics
• Financial sector development
• CS-ARDL
• SADC

PUBLIC INTEREST STATEMENT

The importance of the financial sector to the broader economy cannot be underestimated. This is the sector that plays a huge role of mobilising and allocating capital to productive sectors of the economy. However, there has been divergent views regarding the effects of this sector on the broader economy. The study thus examines the extent to which financial sector development may contribute towards macroeconomic volatility in the Southern African Development Region.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Angola, Botswana, Congo (DR), Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Forget Mingiri Kapingura

Nwabisa Mkosana holds a Masters degree in Economics. Her areas of research are in Financial Economics, with a special focus on the role of the financial sector on the broader economy.

Professor Forget Mingiri Kapingura is an Associate professor in Economics at the University of Fort Hare. His main areas of research are in Development Economics with a special focus on the role of the financial sector in the economy.

Professor Suhal Kusairi is an Associate Professor in Financial Economics at the Faculty of Economics and Business, Telkom University, Bandung Indonesia. His research interests are financial economics, banking industry, behavioural finance, international finances, economic modelling and Islamic finances.