Financial Integration and Consumption Smoothing in Nigeria and Egypt: Do Global Uncertainties Matter?

Abstract

In this study, we adopt the structural vector auto-regressive (SVAR) model to assess the degree to which global uncertainties affect the relationship between financial integration and consumption smoothing in Egypt and Nigeria using quarterly data from 2010 to 2020. The study hypothesises that global uncertainty shocks will have adverse effects on consumption smoothing in both Nigeria and Egypt. Our main results from the study show that the economic policy uncertainty shock has a more declining effect on consumption smoothing in Egypt than other global uncertainty proxies. On the other hand, global economic condition shocks have a more declining effect on consumption smoothing in Nigeria than other global uncertainty proxies. In addition, financial integration accounted for more variability in consumption smoothing in Egypt than in Nigeria; this may be due to the fact that Egypt is more financially integrated than Nigeria. We therefore make the following recommendations: Nigeria may diversify the economy by promoting growth in other sectors, such as manufacturing, to reduce the impact of external shocks on the economy and provide greater stability for households. Policymakers in Egypt can diversify export markets and reduce reliance on the US market to mitigate the impact of US policy fluctuations on Egypt’s economy.

Keywords

• financial integration
• consumption smoothing
• global uncertainties
• economic policy uncertainty
• geopolitical risk
• global economic conditions
• structural var