Output relationships of China and India with the USA: How do the Asian giants respond to America?

Abstract

With the advent of globalization, China and India, the two emerging giants of the world, are being integrated with the US, the leading economy, more than ever before. Hence, examining output relationships among them becomes necessary. This work finds a long run cointegrating relationship in output among these countries. The US economy remains exogenous in the short run error correction mechanism, but China and India correct any deviations from this equilibrium relationship. While theory expects a positive response of China and India to an output shock in America, India, and China respond in a significantly negative fashion to the US economy, as found in impulse responses. The US explains a major share of output variance in these Asian economies, but the reverse is not true. These findings have policy implications not only for India and China, but also for other developing nations that are growing fast through globalization and embracing further integration with the US economy.

Output Relationships in South Asia: Are Bangladesh and India Different from Neighbours?

“…While India might have responded to the output performances of its neighbours, that response had turned out to be too small to be statistically significant. Paul (2012) examines output interactions of three major economies: the US, China and India, where the US economy is extraordinarily big enough to be exogenous in the model. Paul finds that US output does not respond to either China or India in a significant way.…”

“…Abel and Bernanke (2005) assert that trade is an effective channel to transmit business cycles from one country to another. Paul (2010) shows that India's business cycle synchronization with the US has increased since the early 1990s when India embarked on liberalization, and trade acted as an important vehicle of transmission in this regard. Accordingly, Bangladesh's output response to India can be attributed to Bangladesh's voluminous and augmenting trade with India.…”