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.

Keywords:

• Output relationships
• China
• India
• and the US
• cointegration
• impulse responses
• variance decompositions

JEL CLASSIFICATION:

• C22
• C32
• F15
• O57

Acknowledgement

I am thankful to an anonymous referee whose comments helped improve this article.