Does Financial Integration Contribute to Bilateral Trade in Africa: An Empirical Investigation by the Augmented Gravity Model

This article assesses the effect of financial integration on bilateral trade in Africa. Two dimensions of financial integration are considered: regional financial integration (RFI) and international financial integration (IFI). From a sample of 25 African countries, we specify and estimate a gravity model using the Poisson Pseudo Maximum Likelihood (PPML), Negative Binomial (NEGBIN), and Zero Inflated Poisson (ZIP) estimators over the period 1996–2016. Two main results emerge. First, the RFI of co-trading nations (exporter i and importer j) significantly reduces bilateral exports. Second, the exporting country’s IFI significantly increases bilateral trade, while the importing country’s IFI significantly reduces bilateral exports. We suggest a consolidation of RFIs and IFIs to increase intra-African bilateral trade.