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Inflation Expectations in Nepal

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  • T. P. Koirala Ph.D.

    ()
    (Nepal Rastra Bank)

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    Abstract

    There is a significant positive relati onship between inflation and inflation expectations in Nepal, where the latter variable has been generated under Adaptive Expectation Hypothesis (AEH). Using 33 annual observations of actual inflation from 1973 to 2006, one percent increase in inflation expectations has 0.83 percent impact on contemporaneous inflation. The forecastability of inflation expectations on current inflation is higher than that of the expected inflation proxied by one-period lagged inflation. The forecastability of the model has been examined on the basis of minimum Root Mean Squared Error (RMSE). Therefore, it is desirable for the policymakers to consider inflation expectations while formulating monetary policy to anchor in flationary expectations of the economic agents.

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    File URL: http://www.nrb.org.np/ecorev/pdffiles/vol20_art6.pdf
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    Bibliographic Info

    Article provided by Nepal Rastra Bank, Research Department in its journal NRB Economic Review.

    Volume (Year): 20 (2008)
    Issue (Month): (April)
    Pages: 74-85

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    Handle: RePEc:nrb:journl:v:20:y:2008:p:74-85

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    1. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    2. Baxter, Marianne, 1985. "The role of expectations in stabilization policy," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 343-362, May.
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