Monetary Liquidity And Bilateral Trade Flows In West Africa: Evidence From An Augmented PPML Gravity Model

Abstract

This study investigates the extent to which monetary liquidity affects bilateral trade flows in Nigeria, Ghana, and Côte d’Ivoire. Employing an augmented Poisson Pseudo-Maximum Likelihood (PPML) gravity model with data spanning 1990–2023, the analysis considers key macroeconomic variables including exchange rates, inflation, interest rates, GDP, and market size. The results reveal heterogeneous effects across the three countries. In Nigeria, liquidity-driven exchange rate fluctuations and inflation significantly influence bilateral trade flows, reflecting the economy’s sensitivity to external shocks and its oil-dependent export structure. In Ghana, interest rate adjustments constrain trade flows, highlighting the trade-offs inherent in monetary policy, while in Côte d’Ivoire, structural factors and reliance on commodity exports limit the responsiveness of trade to liquidity conditions. The findings confirm that effective monetary liquidity management, coordinated with fiscal policy, is critical for maintaining stable bilateral trade flows and supporting sustainable external sector performance. The study concludes that country-specific and context-driven monetary liquidity strategies, alongside macroeconomic stability measures, are essential for enhancing bilateral trade outcomes in West African economies. The study thus recommends that effective monetary liquidity management, when coordinated with fiscal policy, is crucial for maintaining stable bilateral trade flows and supporting sustainable external sector performance.