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Trade Linkages and Business Cycle Co-movement: An Empirical Analysis of Africa and its Main Trading Partners using Global VAR

This paper assesses the extent of trade linkages and shock transmission between African economies and its main trading partners, namely China, Europe and the United States (US). Using the global vector autoregressive (GVAR) model, the paper investigates how shock transmission between Africa and its main trading partners evolves over the periods before and after the 1990s. Moreover, the paper assesses the extent of business cycle synchronization between Africa and the three trading partners during the same periods. The results suggest that before 1990s, Europe had significant trade linkages with Africa in that shocks to imports and exports in Europe impacted positively on exports and imports in Africa, respectively. However, after the 1990s, Europe’s influence has reduced in favour of China. The results also suggested that the period of significant and strong trade linkages between Africa and China corresponds to the synchronization of their business cycles. This is not the case with Africa and the Euro area as well as Africa and the US, where trade linkage did not translate into business cycle synchronization. Moreover, the results indicate that the US remains the source of contagion for African economies.

Working paper 512
1 April 2015
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