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The Significance of Monetary Policy Transmission Mechanism in the Sustainable Development of the SAARC Economic Community

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  • Muhammad Zahid

    (Department of Agricultural Economics and Management, Zhejiang University, Hangzhou 310058, China)

  • Faiza Khalid

    (Department of Business Administration, Air University Islamabad, Multan Campus, Multan 66000, Pakistan)

  • Muhammad Ramzan

    (Department of Business Administration, Air University Islamabad, Multan Campus, Multan 66000, Pakistan)

  • Muhammad Zia Ul Haq

    (Department of Business Administration, Air University Islamabad, Multan Campus, Multan 66000, Pakistan)

  • Wonseok Lee

    (Department of Tourism and Recreation, Kyonggi University, Seoul 03753, Republic of Korea)

  • Jinsoo Hwang

    (The College of Hospitality and Tourism Management, Sejong University, Seoul 143747, Republic of Korea)

  • Jimin Shim

    (Department of Tourism and Recreation, Kyonggi University, Seoul 03753, Republic of Korea)

Abstract

The purpose of this study is to examine the monetary policy transmission mechanisms in seven South Asian Association for Regional Cooperation (SAARC) countries to discover the viability of the convergence of the SAARC into a monetary and economic union based on common monetary channels. By employing optimal currency area theory, we used the restricted VAR analysis on the annual data from 1978 to 2017. We find that the money channel response provides proof for the presence of an exchange rate and credit channels. Furthermore, the real sector also responds to changes in fiscal and monetary shocks through the exchange rate and credit channels over short-run to long-run time horizons. This implies that the SAARC is a good candidate due to common exchange rate and credit channels. The function of the variance decomposition and the impulse for forming a monetary and economic union is that they share a coincidental pattern of dynamic reactions of inflation and growth to exogenous shocks. If the SAARC monetary and economic union is created, it will reap overall economic benefits inside and outside of Asia just like the European Union (EU).

Suggested Citation

  • Muhammad Zahid & Faiza Khalid & Muhammad Ramzan & Muhammad Zia Ul Haq & Wonseok Lee & Jinsoo Hwang & Jimin Shim, 2021. "The Significance of Monetary Policy Transmission Mechanism in the Sustainable Development of the SAARC Economic Community," Sustainability, MDPI, vol. 13(23), pages 1-19, November.
    • Handle: RePEc:gam:jsusta:v:13:y:2021:i:23:p:13171-:d:689967
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