ISSN No: 1608-6627
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Articles for Volume 27-1

Role of Financial Development in Economic Growth of Nepal: An Empirical Analysis
[Bishnu Prasad Gautam, Ph.D.]

Economic growth and financial development are closely related. The interaction between them is crucial and has attracted great attention of researchers. This study attempts to examine the relationship between economic growth and financial development in Nepal between 1975 and 2012. The paper has used Augmented Dickey-Fuller and Philips-Perron tests to test for the existence of unit root, Co-integration test to examine long run relationship and Granger Causality test to find out causal relationship. In addition, vector error correction method has been applied to find out the speed of adjustment and the dynamics of relationship. The empirical evidence confirms that the financial development causes economic growth. In fact, financial development is the cause for economic growth in terms of short-term dynamics, while economic growth sustains financial development in the long-run. Based on the empirical findings, this study recommends that it is necessary to launch the reform programs in the financial system to consolidate and improve the efficiency and effectiveness of the financial system as well as to cope with the emerging changes. Thus, it asks for the consolidation of the system not only for the positive reinforcement between economic growth and financial development but also for the post crisis resilience and sustainability.

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Testing the J-Curve Hypothesis: A Case of Nepal
[Mahesh Kumar Chaulagai, Ph.D.]

This paper attempts to explore the J-curve phenomenon in the case of Nepalese foreign trade sector in order to examine whether devaluation2 of Nepalese currency can be taken as a policy tool for improving Nepalese trade imbalance with the rest of the world economies. Johansen's cointegration test, vector autoregression (VAR) model, impulse response function as well as autoregressive distributed lag (ARDL) bounds testing cointegration approach has been employed in order to see the relationships between the nominal effective exchange rate index (NEER) and trade balance (TB) as well as the real effective exchange rate index (REER) and trade balance (TB) of Nepal. The study found no evidence of "J-curve" in the case of Nepalese trade. On the contrary to the "J-curve" phenomenon as explained by the classical text books, the findings of the study suggest that depreciation of Nepalese exchange rate rather produces a flatter "L-curve" phenomenon indicating that there is no room for improving Nepalese trade imbalance through a currency devaluation process.

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Cyclicality in the Fiscal Policy of Nepal
[T.P. Koirala, Ph.D]

This paper examines discretionary fiscal policy response to the business cycle of Nepal using annual time series ranging from 1975 to 2013. The Cyclically Adjusted Balance (CAB) of overall budget balance is utilized as a measure of discretionary fiscal actions and the output gap a measures of business cycles. Graphical depiction of the CAB accompanied with the output gap shows that the government of Nepal has been pursuing counter-cyclical fiscal policy in the post liberalization period and pro-cyclical in the pre-liberalization period. In line with the recent empirical finding that only counter-cyclical fiscal policy is capable in performing stabilization function, this paper found that the fiscal stimulus of the government of Nepal has also been adding aggregate demand during downturns (bad time) and withdrawing demand during upturns (good time) as envisaged by counter-cyclical discretionary fiscal policy. The counter-cyclicality as such is strong during 2000s whereas there is mild pro-cyclicality during the period 2011-13. For computing CAB, this paper assumes unitary elasticity of revenue with respect to output gap and zero expenditure elasticity with respect to output gap. The output gap has been estimated based on the trend component of the GDP using Kalman filter method. Factors like stronger institutions and sound macroeconomic policies might overcome recent pro-cyclicality of Nepal and allows room for counter-cyclical fiscal policy in the future. Similarly, the phenomenon of high fluctuations in the fiscal impulse over time indicates uncertain and inconsistent fiscal stance of the government. It demands for focus more on automatic stabilizers rather than more discretionary fiscal actions by broadening tax bases and social safety nets.

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Financial Literacy in Nepal: A Survey Analysis from College Students
[Bharat Singh Thapa & Surendra Raj Nepal]

This study surveys 436 college students to examine their financial literacy; the impact of demographic, educational and personality characteristics on financial literacy. Mean, ANOVA and logistic regression were used in carrying out analysis. Results show that most of the students have basic level of financial knowledge but they lack in understanding of credit, taxes, share market, financial statement and insurance. Students are highly influenced by their parents at home and they have positive attitude towards savings. The study further identified income, age, stream of education, types of college, and attitude of students as determinants of financial knowledge; and financial knowledge is unaffected by gender, university affiliation, financial behavior and influence. It is concluded that college students have basic level of financial knowledge. However, overall financial knowledge of the students is affected by some of their demographic, educational and personality characteristics.

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An Examination of Nepals Export Choice based on Revealed Comparative Advantage
[Nimesh Salike & Benli Lu]

This paper examines the comparative advantage of a selection of 27 Nepals export products, of which 16 are extracted from the Nepal Trade Integration Strategy (NTIS 2010) list of potential priority exports. The primary purpose of this study is to investigate if these priority export products are in alignment with the concept of comparative advantage. Balassas revealed comparative advantage (RCA) index is used as the methodology for analysis while the data used spans from 2000 to 2011. Empirical results show that out of the 16 NTIS 2010 potential priority exports, only 10 are products which Nepal has comparative advantage in producing, major ones being pashmina, wool and agro food products. The findings also reveal that there are at least three other products- carpets, textile and juice that Nepal poses high RCA indices but are not included under NTIS 2010 priority list.

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