Financial sector development, inflation and openness: A comparative panel study of ECOWAS and SADC

This paper provides an empirical analysis of the comparative study between the Economic Community of West African States (ECOWAS) and Southern African Development Community (SADC) on the role of inflation in explaining the state of financial development of the two regions. In addition, the study seeks to find out if Rajan and Zingales Hypothesis which argues that simultaneous opening of both trade and financial sector is the key for financial development to take place is supported in the two regions. Using dynamic panel approach and data for the period 1980-2011, our findings provide evidence that in both regions inflation robustly reverse financial development with the effect in ECOWAS greatest. In addition, the study indicates that even though more simultaneously opening of the financial sector and trade lead to more financial development in SADC, trade openness alone can still trigger growth in the sector but more financial openness alone is detrimental to financial development of the region. Hence this seems to provide partial support for the hypothesis. However, the hypothesis is rejected in ECOWAS.

Working paper 528
1 June 2015

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