Intra-regional spillovers from Nigeria and South Africa to the rest of Africa: New evidence from a FAVAR model

This paper examines the effects of intraregional spillovers propagated by Nigeria and South Africa on real economic activities and interest rates movement in three African regional blocs (i.e., ECOWAS, SADC and CEMAC) employing the factor augmented VAR (FAVAR) modelling approach over the period 1980Q2–2015Q1. Moreover, a counterfactual analysis, based on the same modelling approach, is conducted to assess what would happen to the real activities and monetary policy indicators of the three regional blocs in the absence of real and monetary shocks from the two countries. The paper finds that while the influence of Nigeria is limited to ECOWAS, South Africa plays an influential role on the real sectors and financial systems of all the regional blocs, albeit with short-lived impacts on ECOWAS and CEMAC. Moreover, the results of the counterfactual analysis show that real and financial activities in the SADC regions are highly influenced by South Africa. Our result suggests that countries with proper coordination of macroeconomic and monetary policies as well as organised financial market should be the sources of contagion and spillover, mostly at regional level.