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Modelling and Forecasting Fiscal Policy and Economic Growth in Nepal

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  • Ram Sharan Kharel Ph.D.

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    (Nepal Rastra Bank)

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    Abstract

    This paper develops a macroeconomic forecasting model focusing on fiscal policy and economic growth in Nepal. The structure of the model, which comprises a total of 14 equations, allows alternative policy options for maintaining fiscal stability and promoting economic growth as well as switching deficit financing between domestic and foreign loans. We use annual data from 1992/93 to 2009/10 to estimate the model and provide out-sample forecasts for 2010/11 to 2012/13, consistent with the current Three Year Plan period, in order to evaluate the plan performance. The empirical evidence suggests that fiscal policy, particularly governments' capital expenditure affects economic growth positively and also crowds-in private investment. However, there exists a trade-off between fiscal stability and high level of economic growth as the policy goal of achieving both objectives seems to be unattainable. Finally, the out-sample forecast suggests that it is unlikely to attain the targeted economic growth in the Three Year Plan period from the planned fiscal outlay even if it is realized.

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    Bibliographic Info

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

    Volume (Year): 24 (2012)
    Issue (Month): 1 (April)
    Pages: 1-15

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    Handle: RePEc:nrb:journl:v:24:y:2012:i:1:p:1-15

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    Web page: http://www.nrb.org.np/ecorev/
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    Related research

    Keywords: Fiscal Policy; Macroeconomic Modeling; Economic Growth;

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    1. Jones, Charles I, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 495-525, May.
    2. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
    3. Stephen Turnovsky, 2000. "The Transitional Dynamics of Fiscal Policy: Long-run Capital Accumulation and Growth," Working Papers 0018, University of Washington, Department of Economics.
    4. Ram Sharan Kharel PhD & Tap Prasad Koirala PhD, 2011. "Spatial Price Integration in Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 23(1), pages 21-36, April.
    5. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
    6. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
    7. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
    8. Min Bahadur Shrestha, Ph.D., 2006. "Testing for Unit Roots in Nepalese Macroeconomic Data," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 18, pages 1-19, April.
    9. Theodore Pelagidis & Evangelia Desli, 2004. "Deficits, growth, and the current slowdown: what role for fiscal policy?," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 26(3), pages 461-469, April.
    10. Mehrotra, Aaron N. & Peltonen, Tuomas A., 2005. "Socio-economic development and fiscal policy: lessons from the cohesion countries for the new member states," Working Paper Series 0467, European Central Bank.
    11. Peretto, Pietro F, 2003. " Fiscal Policy and Long-Run Growth in R&D-Based Models with Endogenous Market Structure," Journal of Economic Growth, Springer, vol. 8(3), pages 325-47, September.
    12. Khan, Mohsin S & Kumar, Manmohan S, 1997. "Public and Private Investment and the Growth Process in Developing Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 59(1), pages 69-88, February.
    13. Eric M. Engen & Jonathan Skinner, 1992. "Fiscal Policy and Economic Growth," NBER Working Papers 4223, National Bureau of Economic Research, Inc.
    14. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November.
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