| Title : | Determinants of inflation in Nepal | | Material Type: | printed text | | Authors: | Munna Bhetwal, Author | | Publication Date: | 2017 | | Pagination: | 99p. | | Size: | GRP/Thesis | | Accompanying material: | 9/B | | Languages : | English | | Descriptors: | Inflation (Finance)
| | Class number: | 330.941 | | Abstract: | Inflation has in several times been characterized by an upsetting impact on economic well-being, since it causes the cost of living to rise and the value of investments to fall (Greenidge and Dacosta, 2009). Inflation is a condition in economy when money starts losing its value which actually means that with same amount of money one can buy only lesser goods. The significance of Inflation lies in the fact that it makes you poorer in real sense. A mild rate of inflation is good for an economy but many developing countries of the world are experiencing inflation above the mild rate which is harmful for the economy. Control of inflation has, therefore, become one of the primary objectives of government as well as central bank in many developing countries.
This study is conducted to analyze the determinants of the inflation in Nepalese economy. More specifically, study has been conducted to test long run cointegrating relationship between macroeconomic variables and inflation along with analysis of direction of causality between macroeconomic variables and inflation, both in long run and short run in the case of Nepal for the period of 1995 to 2015. Macroeconomic variables such as GDP growth rate, money supply, budget deficit, Indian inflation, remittance and trade openness are used as the independent variables. Inflation has been measured by consumer price index (CPI) and GDP deflator.
For integration and cointegration technique, this study employed Augmented Dickey Fuller (ADF) unit root and ARDL approach to cointegration by Pesaran et al. (1997) in order to test the of stationarity and the long run relationship, respectively. The ARDL approach has been, further, used to analyze the long run dynamics of the macroeconomic variables and inflation. The error correction model has been developed from ARDL approach to analyze the short run relationship between macroeconomic variables and inflation. The same model has also been used to analyze the direction of causality in short run. The regression diagnostic tests have also been performed to check the validity of proposed model. The Jarque – Bera (JB) test, Ramsey test, and Lagrange Multiplier (LM) tests are used to test the normality, functional form and serial correlation respectively.
The ARDL bound testing approach to cointegration by Pesaran et al (1997) estimates show that there is fairly a long run cointegrating relationship between inflation and macroeconomic variables. Therefore, it is clear indication that long run causality is one way from macroeconomic variables to economic growth. The long run estimates of the estimated (p, q, r, s, m, n) models indicate that Indian inflation has economically and statistically significant impact on Nepalese inflation in long run. Similarly, GDP growth rate, broad money supply, Indian inflation, trade openness and remittance are found to be positively correlated with inflation. The diagnostic statistics (normality, autocorrelation, and functional form misspecification) show that the used ARDL model seems to be data congruent and free from specification error. The estimates of short run ARDL error correction model depicted that error correction term (ECM) lagged one period is negative and highly significant in all estimated models indicating macroeconomic variables and inflation are cointegrated. Reasonably, large coefficients of ECM term indicate that speed of adjustment to the equilibrium after a shock of previous period is very high. The short run estimates of the model shows that remittance has significant positive impact on inflation.
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Determinants of inflation in Nepal [printed text] / Munna Bhetwal, Author . - 2017 . - 99p. ; GRP/Thesis + 9/B. Languages : English | Descriptors: | Inflation (Finance)
| | Class number: | 330.941 | | Abstract: | Inflation has in several times been characterized by an upsetting impact on economic well-being, since it causes the cost of living to rise and the value of investments to fall (Greenidge and Dacosta, 2009). Inflation is a condition in economy when money starts losing its value which actually means that with same amount of money one can buy only lesser goods. The significance of Inflation lies in the fact that it makes you poorer in real sense. A mild rate of inflation is good for an economy but many developing countries of the world are experiencing inflation above the mild rate which is harmful for the economy. Control of inflation has, therefore, become one of the primary objectives of government as well as central bank in many developing countries.
This study is conducted to analyze the determinants of the inflation in Nepalese economy. More specifically, study has been conducted to test long run cointegrating relationship between macroeconomic variables and inflation along with analysis of direction of causality between macroeconomic variables and inflation, both in long run and short run in the case of Nepal for the period of 1995 to 2015. Macroeconomic variables such as GDP growth rate, money supply, budget deficit, Indian inflation, remittance and trade openness are used as the independent variables. Inflation has been measured by consumer price index (CPI) and GDP deflator.
For integration and cointegration technique, this study employed Augmented Dickey Fuller (ADF) unit root and ARDL approach to cointegration by Pesaran et al. (1997) in order to test the of stationarity and the long run relationship, respectively. The ARDL approach has been, further, used to analyze the long run dynamics of the macroeconomic variables and inflation. The error correction model has been developed from ARDL approach to analyze the short run relationship between macroeconomic variables and inflation. The same model has also been used to analyze the direction of causality in short run. The regression diagnostic tests have also been performed to check the validity of proposed model. The Jarque – Bera (JB) test, Ramsey test, and Lagrange Multiplier (LM) tests are used to test the normality, functional form and serial correlation respectively.
The ARDL bound testing approach to cointegration by Pesaran et al (1997) estimates show that there is fairly a long run cointegrating relationship between inflation and macroeconomic variables. Therefore, it is clear indication that long run causality is one way from macroeconomic variables to economic growth. The long run estimates of the estimated (p, q, r, s, m, n) models indicate that Indian inflation has economically and statistically significant impact on Nepalese inflation in long run. Similarly, GDP growth rate, broad money supply, Indian inflation, trade openness and remittance are found to be positively correlated with inflation. The diagnostic statistics (normality, autocorrelation, and functional form misspecification) show that the used ARDL model seems to be data congruent and free from specification error. The estimates of short run ARDL error correction model depicted that error correction term (ECM) lagged one period is negative and highly significant in all estimated models indicating macroeconomic variables and inflation are cointegrated. Reasonably, large coefficients of ECM term indicate that speed of adjustment to the equilibrium after a shock of previous period is very high. The short run estimates of the model shows that remittance has significant positive impact on inflation.
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