Empirical econometric analysis of relationship between fiscal- monetary policies and output on Saarc countries

The seminal 1968 paper of Anderson and Jordan on the relative effectiveness of monetary and fiscal policy on output stabilization caused many debates among both economists and policy makers. This paper uses a standard unrestricted VAR (vector autoregression) model to analyze the above relationship for five SAARC (South Asian Association of Regional Cooperation) countries (Bangladesh, India, Nepal, Pakistan and Sri Lanka) over the period of 1974-2007. In a system of five-equation of VAR model, this paper reveals that money supply, government expenditure, the real exchange rate and the foreign interest rate are co-integrated for all countries. The results of both the VD (Variance decomposition) and the IRFs (Impulse response functions) indicate that monetary policy has been more effective on output than fiscal policy in the case of Pakistan and Sri Lanka, whereas fiscal policy has had a more powerful effect than monetary policy on Bangladesh, India and Nepal.