Effects of Volatility, Fiscal Policy Cyclicality and Financial Development on Growth in South Asia

Abstract

This study empirically investigates the association between macroeconomic volatility and growth in the presence of credit constraints and governmental fiscal policy stance. This study considers four South Asian countries: Bangladesh, India, Pakistan, and Sri Lanka to examine the relationship between macroeconomic volatility and growth during the period lasting from 1980 to 2018 using the fully modified least square method. This study finds an inverse impact of volatility on growth in the presence of financial market constraints as credit market imperfections restrict companies from borrowing which eventually affect long-term investment and innovations. Also, the results suggest that fiscal policy for South Asian countries is pro-cyclical.