Asymmetric Effects of Financial and Trade Integration Policy Shocks and Economic Vulnerability in South Africa

Chedlia Farhat

Abstract: This study examines the impact of open trade and financial policy on macroeconomic vulnerability in South Africa over the period 1984-2018. In order to address this dynamic nature, we apply the structural vector autoregression model (SVAR) estimation. The choice of the country was based on its membership in the African, Caribbean and Pacific (ACP) group of states, which benefit from economic partnership agreements with the European Union, ensuring that the advantages of open trade are accompanied by rules equally shared by all. Our analysis is built on models that take into account the asymmetric diffusion different sources of shocks. The empirical results indicate that the South African economy is marked by asymmetries, insofar as the impulse responses and the degrees of variables sensitivity to the same type of shock are different. As a result, we suggest adjustment mechanisms to asymmetric shocks that reduce macroeconomic vulnerability. Thus, deepening financial integration increases real convergence, leading the banking system to a better allocation of domestic savings to exports, which in turn weakens the effect of shock and boosts inclusive growth. This positive relationship is justified by good governance, flexible exchange rate regime, and healthy open economy. On the other hand, the opening of the capital account alone is unlikely to fuel product market competition and attract FDI. Thus, the development of trade integration to the extent of adjusting imbalances through policy consolidation, deepening financial development, and structural economic performance allows for real convergence and enhances the symmetry of shocks in South Africa.

Keywords: asymmetry, financial integration, macroeconomic vulnerability, trade integration, shocks, structural VAR

Edition: Volume 11 Issue 1, January 2022,

Pages: 575 - 588