Similarities yet divergence in South Asian macroeconomic performance

Ashima Goyal

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: Stylized business cycle facts for South Asia are similar and differ from other regions. They show the dominance of supply shocks, often amplified by macroeconomic policies and procyclical current accounts. Interest and exchange rate volatility rose initially on liberalization, but fell as markets deepened. A gradual middling through approach to openness and market development with flexible exchange rates worked well initially. But a combination of excessive government/foreign borrowing and inadequate reserves made it difficult for smaller countries to withstand the multiple external shocks that began with the global pandemic. Domestic ability to smooth shocks and global safety nets are both essential. India benefitted from growing diversity, evolution to countercyclical macroeconomic policy better suited to structure, a good coordination of monetary and fiscal policies with balance between demand stimulus and continuing supply-side reforms. Reserves and capital flow management policies helped insulate from global shocks. Intervention damped excess exchange rate volatility reducing risk premiums.

Keywords: South Asia; supply shocks; flexible exchange rates; diversity; smoothing (search for similar items in EconPapers)
JEL-codes: E3 E63 O11 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2023-12
New Economics Papers: this item is included in nep-fdg, nep-ifn and nep-opm
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