| Title : | Determinants of inflation in Nepal | | Material Type: | printed text | | Authors: | Pratik Jonchhe, Author | | Publication Date: | 2018 | | Pagination: | 97p. | | Size: | GRP/Thesis | | Accompanying material: | 11/B | | Languages : | English | | Descriptors: | Inflation (Finance)
| | Class number: | 341.247 | | 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 1994/95 to 2015/16. Macroeconomic variables such as GDP growth rate, money supply, foreign exchange rate, interest rate, budget deficit, unemployment rate, Indian inflation, remittance and trade openness are used as the independent variables. Inflation has been measured by consumer price index (CPI) and GDP deflator.
The study is based on the secondary data which were gathered for 11 macroeconomic variables. The main sources of data are Quarterly Economic Bulletin published by Rastra Bank (NRB), The World Bank Annual Report, Economic Survey of Ministry of Finance, Nepal, Four-Monthly Statistical Bulletin of Central Bureau of Statistics, Nepal. The time series data analysis has been undertaken in the study. The research design adopted in this study is causal comparative type as it deals with relationship between the dependent and independent variables taken for this study. The data were collected from the time period 1994/95 to 2015/16. The methods used for secondary data analysis included descriptive statistics analysis, correlation analysis and regression analysis.
The result shows that inflation is positively related to GDP growth rate, money supply (M2) which indicates that higher the GDP growth rate and money supply, higher would be inflation. Therefore, if the economy wants to control inflation then excessive money circulation in economy should be controlled. Similarly, foreign exchange rate and budget deficit have positive impact on CPI indicating that higher the interest rate and budget deficit, higher would be the CPI and GDP deflator. However, there is negative impact on GDP deflator. Thus, the study suggests that central bank should focus on to decrease the bank rate and credit creation. Also, an important measure to control the inflation in economy is to adopt anti-inflationary budgetary policy. For this purpose, the government should give up deficit financing and instead have surplus budgets. It means collecting more in revenues and spending less.
The study also reveals that Indian inflation has positive impacts on Nepalese inflation indicating that higher the Indian inflation, higher would be Nepalese inflation. Hence, concerned government bodies must be alert and apply appropriate tools and techniques to control inflation when there is probability of huge rise in Indian inflation, similarly, there is positive relationship between inflation and remittance inflow. This implies increase in remittance leads to increase in inflation. However, unemployment rate has negative impacts on inflation which indicates that lower the unemployment rate higher would be inflation in Nepalese economy.
The major limitation of this study is that it has included the annual data of only 22 years. It would be better if the study has used the data of several years. There are other factors that influence the inflation in Nepalese economy such as political, instability, corruption, black marketing and so on. Although there are limitations, the findings have significant result which can help to those who wants to make further study including these variables in determining the inflation in Nepalese economy.
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Determinants of inflation in Nepal [printed text] / Pratik Jonchhe, Author . - 2018 . - 97p. ; GRP/Thesis + 11/B. Languages : English | Descriptors: | Inflation (Finance)
| | Class number: | 341.247 | | 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 1994/95 to 2015/16. Macroeconomic variables such as GDP growth rate, money supply, foreign exchange rate, interest rate, budget deficit, unemployment rate, Indian inflation, remittance and trade openness are used as the independent variables. Inflation has been measured by consumer price index (CPI) and GDP deflator.
The study is based on the secondary data which were gathered for 11 macroeconomic variables. The main sources of data are Quarterly Economic Bulletin published by Rastra Bank (NRB), The World Bank Annual Report, Economic Survey of Ministry of Finance, Nepal, Four-Monthly Statistical Bulletin of Central Bureau of Statistics, Nepal. The time series data analysis has been undertaken in the study. The research design adopted in this study is causal comparative type as it deals with relationship between the dependent and independent variables taken for this study. The data were collected from the time period 1994/95 to 2015/16. The methods used for secondary data analysis included descriptive statistics analysis, correlation analysis and regression analysis.
The result shows that inflation is positively related to GDP growth rate, money supply (M2) which indicates that higher the GDP growth rate and money supply, higher would be inflation. Therefore, if the economy wants to control inflation then excessive money circulation in economy should be controlled. Similarly, foreign exchange rate and budget deficit have positive impact on CPI indicating that higher the interest rate and budget deficit, higher would be the CPI and GDP deflator. However, there is negative impact on GDP deflator. Thus, the study suggests that central bank should focus on to decrease the bank rate and credit creation. Also, an important measure to control the inflation in economy is to adopt anti-inflationary budgetary policy. For this purpose, the government should give up deficit financing and instead have surplus budgets. It means collecting more in revenues and spending less.
The study also reveals that Indian inflation has positive impacts on Nepalese inflation indicating that higher the Indian inflation, higher would be Nepalese inflation. Hence, concerned government bodies must be alert and apply appropriate tools and techniques to control inflation when there is probability of huge rise in Indian inflation, similarly, there is positive relationship between inflation and remittance inflow. This implies increase in remittance leads to increase in inflation. However, unemployment rate has negative impacts on inflation which indicates that lower the unemployment rate higher would be inflation in Nepalese economy.
The major limitation of this study is that it has included the annual data of only 22 years. It would be better if the study has used the data of several years. There are other factors that influence the inflation in Nepalese economy such as political, instability, corruption, black marketing and so on. Although there are limitations, the findings have significant result which can help to those who wants to make further study including these variables in determining the inflation in Nepalese economy.
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