Does Regional Integration Insulate Member Countries from External Spillovers? Studying Trade Shock Transmission between ECOWAS and the Global Economy

Abstract

To ascertain if regional economic integration insulates member countries from external spillovers, this work studied the transmission of trade shocks between ECOWAS and the global economy. It adopted the Diebold and Yilmaz (2009) network approach using quarterly data from 1986Q1to 2019Q4 for selected countries. Data were subjected to preliminary tests using the Phillip-Peron unit root test to establish the order of statonarity and Johansen co-integration test to establish existence of co-integration among variables. Following results of preliminary tests, the underlying VAR model was estimated in error correction form. The forecast error variance decompositions (FEVDs) were subsequently generated and used to build generalized trade linkage measures for analysis. Result of the analysis show that ECOWAS economies are highly linked to the global economy, and are net receivers of trade shocks. The study recommends ECOWAS countries diversify to heavy industrial manufacturing, fashion out uniform trade policies to insulate the region from potential trade shocks.