ASSESSING THE IMPACT OF MONETARY TRANSMISSION CHANNELS AND INSTITUTIONAL QUALITY ON ECONOMIC GROWTH: EVIDENCE FROM SOUTH ASIAN ECONOMIES

Abstract

This study examines the impact of key macroeconomic variables interest rates, exchange rates, and institutional quality on economic growth in seven South Asian economies between 1996 and 2022. Employing second-generation unit root tests, such as CIPS and CADF, to account for cross-sectional dependence, the results confirm stationarity in the data. The Westerlund cointegration test identifies long-run equilibrium relationships among non-stationary variables, while the Generalized Method of Moments (GMM) is used to address endogeneity in dynamic panel models. The results reveal that higher interest rates negatively impact growth by suppressing investment, while favorable exchange rates positively influence GDP by enhancing competitiveness. Institutional quality significantly
fosters economic growth, highlighting the importance of governance in economic performance. However, financial development and labor market inefficiencies hinder growth, whereas investment plays a critical role in driving economic development. These findings offer valuable insights into the macroeconomic dynamics shaping the growth trajectories of South Asian economies.