Threshold Effects of Financial Sector Development on International Trade in Africa

Earlier studies on threshold effects of financial sector development on international trade have relied on rudimentary approach which assumes exogenous inclusion of quadratic square terms of finance. However, findings from such studies are not instructive as it obscures country's unique domestic conditions such as differences in the levels of financial sector development. By relying on 46 countries in Africa over the period 1980–2016, this study employs a sample splitting and threshold estimation approach which allows finance–international trade to be mediated by the level of domestic financial sector development. We find evidence of threshold effects for a number of the countries suggesting that the precise impact of financial development on international trade is threshold–specific given the various indicators of finance. The study highlights that whether finance supports or limits international trade crucially depends on the attainment of a certain threshold which is both country and indicator–specific.