Effects of economic growth volatility on long-term economic growth in the economic community of West African states: the role of financial development

This study examines the role of financial development in shaping the relationship between macroeconomic volatility and long-term economic growth in a panel of 15 Economic Community of West African States (ECOWAS) countries over the period 1984–2019. The empirical analysis relies on the instrumental variable mean group (IVMG) estimator, which allows for cross-country heterogeneity in long-run dynamics. The results provide robust evidence of a negative and statistically significant effect of macroeconomic volatility on long-term growth in the region. Importantly, this relationship is shown to be conditional on the level of financial development, with deeper financial systems significantly mitigating the adverse growth effects of volatility. These findings suggest that policies aimed at strengthening domestic financial systems are critical for sustaining long-term growth in an environment characterized by frequent shocks. The results remain robust across a range of sensitivity analyses, including the use of a composite indicator of financial depth as well as the substitution of real GDP growth with per capita GDP growth and the computation of volatility using five-year rolling standard deviations.