Does the Long Arm of US Macroeconomic Policy Reach South Asia?

What is the effect of US macroeconomic policy on the business cycle of South Asian economies? The evidence reported in this article suggests that there is little systematic contemporaneous effect of US monetary policy on South Asian GDP. The lagged effect of US monetary policy tends to be statistically significant, but it appears that a monetary expansion in the US in year t lowers real GDP in year t + 1 in a majority of South Asian economies. Conversely, US fiscal policy has both contemporaneous and lagged Keynesian effects in a majority of countries. Interestingly, the lagged effect is quantitatively larger than the contemporaneous effect. The paper also looks at the impact of domestic macroeconomic policy in South Asian countries. Two key results emerge in this respect. First, the contemporaneous effects of domestic monetary and fiscal policy are in line with ‘Keynesian’ predictions: an increase (decrease) in government consumption or money growth increases (decreases) real GDP. Second, there is also evidence of significant lagged effects of domestic macroeconomic policies. However, while the sign of the lagged effect of fiscal policy is generally the same as the sign of the contemporaneous effect, for monetary policy the sign of the lagged effect is inverted in some countries. JEL Classification: E32 E52, E63, E62, C23