Pakistan Institute of Development Economics



Determinants of GDP Fluctuations in Selected South AsianCountries: A Macro-Panel Study

Now a days, the issue of volatility in GDP is becoming afundamental development concern due to the undeniable connectionsbetween volatility and lack of development. In addition, the recognitionof the negative link between short-term fluctuations and long-termgrowth not only signifies the importance of exploring this link but alsostresses the importance of studying the determinants of the GDPfluctuations so that the efforts to manage these fluctuations can bemade. Therefore, keeping in view, the importance of studying the factorcausing fluctuations in GDP, the present study aims at exploring thedeterminants of GDP fluctuations using macro panel approach in a panelof five selected South Asian countries (SSAC) including Bangladesh,India, Nepal, Pakistan and Sri Lanka over the period of 1980- 2010. Forthis purpose, modern non-stationary panel techniques such as crosssection dependence test, second generation unit root test under crosssectional dependence, panel cointegration and Group Mean Fully ModifiedOLS (GM-FMOLS) estimation are applied. The results of the group meanFMOLS estimates show that aid dependence (AIDGDP), trade openness(OPEN), volatility in the price level (PRIVOL), reliance on agriculture(AGRGDP) and political stability (POLSTB) are the significantdeterminants of the GDP fluctuations. Thus, it is suggested that thesedeterminants may be managed to reduce the volatility in GDP growth rate.JEL Classification: E32, F44, N15 Keywords: Determinants of GDPFluctuations, Determinants of GDP Volatility, South Asia, Group MeanFMOLS, Panel Cointegration, Macro Panel, Business CycleFluctuations

Ghulam Mohey-ud-din,

Muhammad Wasif Siddiqui