Abstract

This study investigates macroeconomic interdependence of countries in the Indian subcontinent and discusses its implications on the possible integration schemes. Towards this goal, the interrelatedness, the degree of coherence and the long and short term movements in selected macroeconomic variables in seven countries of this region are explored. Moreover, in a dynamic structural vector autoregressive similar economic disturbances to satisfy one of the conditions for forming a currency area in the spirit of Mundell's theory. We observe that the degree of interdependence among countries of the Indian sub-continent is rather low. These countries should probably continue with liberalization efforts, which naturally lead to higher macro-interdependence among them, which would later create a solid ground for future integration efforts. Moreover, they should not experiment with pegging their exchange rates among each other, rather, in future, they should rely more on the floating rates.