GDP Fluctuations and Long-Run Economic Growth: A Study of Selected South Asian Countries

Abstract

This paper studies the relationship between GDP fluctuations and long-run economic growth by using macro-panel approach (with small N and large T) in a panel of five selected South Asian countries (SSAC) including Bangladesh, India, Nepal, Pakistan and Sri Lanka, over a period of 1980-2010. For this purpose, modern non-stationary panel techniques such as the cross section dependence test, unit root test under cross sectional dependence, panel cointegration and Group Mean Fully Modified OLS (GM-FMOLS) estimation are applied. The study finds a significant long-run cointegrating relationship between GDP fluctuations and long-run growth in the SSAC and GM-FMOLS estimates and shows that this link is negative. It indicates that GDP fluctuations have a significant negative impact on long-run growth in the SSAC and these fluctuations of GDP may be detrimental for long-run growth in developing countries. Therefore, the governments of such countries shouldn't rely on growth-oriented policies only but should equally focus on managing these fluctuations in GDP to achieve sustained and stable growth rate.