ISSN No: 1608-6627
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Articles for Volume 23-2

Macro-Financial Link and Monetary Policy Management: Insight from the Case of Nepal
[Nephil Matangi Maskay, Ph.D. & Rajendra Pandit ]

Increasing financial sector development and globalization have significantly changed the naturo of macro-financial link. The paper aims to obtain insight on how these changes have impacted on the effectiveness of monetary policy management, by undergoing a case study of Nepal. The empirical results over the thirty five year period spanning FY 1975 to FY 2009, find that the elasticity of the real interest rate is not economically and statistically significant in relation to the output gap. This result is further explored by examining sequentially the contributions of direct financing, domestic financial sector development and external integration. The results suggest that while their respective contribution to the elasticity of the real interest rate is now statistically significant, however it remains economically insignificant. Further the direction of effect is opposite to that of the theoretically predicted sign; this contrary result implies that the residual is driving the regression results. The results further suggest that the economic regime shift in early-1990s, had contributed to weaken the elasticity of the real interest rate. The general insight from the Nepalese case study is that countries have to re-examine on a regular basis the nature of macro-financial link to ensure optimal monetary policy management.

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Tourism and Economic Growth in Nepal
[Bishnu Prasad Gautam, Ph.D.]

Tourism has become an important economic activity in all the countries of the world. It creates various direct, indirect and induced effects in the economy. This paper attempts to confirm empirically about the positive impact of tourism in Nepal. It is based on Nepalese data of foreign exchange earnings from tourism and gross domestic product for the period between FY 1974/75 and 2009/10. Co-integration test has been done for ascertaining long run relationship and error correction method for short run dynamics. Granger Causality test has been applied to determine causal relationship between these variables. The evidence confirms the conventional wisdom that of tourism development, that tourism (represented by foreign exchange earnings) causes economic growth both in short and long run. The result also indicates bi-directional causality between these variables.

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New Open Economy Macroeconomics: Evidence from an Empirical Test on South Asian Economic Data
[Bamadev Paudel, Ph.D.]

This study first conducts a detailed survey on recently emerged new field in economics called new open economy macroeconomics and then carries out an empirical test of theoretical predictions of these models to observe transmission effects of Indian economic shocks in South Asia region. In the survey, the study starts with the seminal work of Obstfeld and Rogoff (1995) and then evaluates the subsequent evolution of this field. The survey reveals that the field is rapidly evolving with many dimensions added on it within a short period of time, making this field richer and betterable to perform better predictions. The estimation of Vector Autoregression model for South Asia region, on the other hand, uncovers that the effects of Indian shocks in South Asia region, have mixed results. Since the real, nominal, and financial shocks generated in India affect the economies of neighboring countries with varied extent.

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Sensitivity of the Trade Openness in Nepal
[Shashi Kant Chaudhary]

In this paper, Openness Growth Monitoring (OGM) Model is applied to examine the various aspects of trade openness like vulnerability, sensitivity and harmonization as well as the impact of trade openness on per capita income growth for the period of 1990/91 to 2010/11. The results suggest that overall trade openness vulnerability of Nepal is low with the manufacturing and service sector being more open in comparison to the agriculture and energy sectors. While there is strong performance of the openness growth rate for the review period, the average ratio of the openness growth and per capita income growth both with nominal income, is negative. The results indicate low sensitivity of per capita income growth to the trade openness growth. The findingsreveal that the productivity benefits from additional trade are higher for the trading partners of Nepal than itself. Hence, it is argued that Nepal has liberalized trade without introducing appropriate internal policies and institutions.

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