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Demand for Money in Nepal: An ARDL Bounds Testing Approach

Author

Listed:
  • Birendra Bahadur Budha

    (Nepal Rastra Bank)

Abstract

This paper investigates the demand for money in Nepal using the Autoregressive Distributed Lag (ARDL) approach for the period of 1975-2011.The results based on the bounds testing procedure reveal that there exist the cointegration among the real money aggregates (and), real income, inflation and interest rate. The real income elasticity coefficient is found to be positive and the inflation coefficient is negative. The interest rate coefficient is negative for both of the real monetary aggregates supporting the theoretical explanation. In addition, the error correction models suggest that the deviations from the long-run equilibrium are short-lived in than . Finally, the CUSUM and CUSUMSQ tests reveal that the money demand function is stable, but money demand function is not stable implying that the monetary policy should pay more attention to than . s. Nepal exports more to SAFTA countries than non-SAFTA and imports less from the OECD countries than non-OECD. As per basic idea of gravity model, distance to trade partner countries is highly significant implying higher the distance, lower the trade. The country specific fixed effect analysis shows that time invariant factors are also significant to determine the trade balance of Nepal.

Suggested Citation

  • Birendra Bahadur Budha, 2013. "Demand for Money in Nepal: An ARDL Bounds Testing Approach," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 25(1), pages 21-36, April.
    • Handle: RePEc:nrb:journl:v:25:y:2013:i:1:p:2
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Money Demand; Bounds test; Stability; Nepal;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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