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An Empirical Analysis of Money Supply Process in Nepal

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  • Prakash Kumar Shrestha Ph.D.

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    (Nepal Rastra Bank)

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    Abstract

    This paper examines the money supply process in Nepal empirically on the basis of mainstream and Post-Keynesian theoretical perspectives for both pre and post-liberalization period covering the sample period of 1965/66-2009/10. The relative contribution of different components of money supply has been computed and the money supply as well as money multiplier function has been estimated. Empirical results show that disposable high powered money is found to be a major contributor to the change in monetary aggregates without any significant structural break. However, the degree of controllability of high powered money is not strong, and neither CRR nor Bank Rate has been effective monetary policy tools so far. Open market operation is found statistically significant only at 10 percent level of significance to influence disposable high powered money. On the other hand, money multipliers are affected by currency ratio, time deposits ratio and excess reserve ratio, but not by CRR. On the other hand, Granger causality based test of Post-Keynesian hypothesis reveals that money supply endogeniety cannot be ruled out. Hence, monetary policy framework needs to be changed accordingly and OMO should be strengthened further.

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    Bibliographic Info

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

    Volume (Year): 25 (2013)
    Issue (Month): 2 (October)
    Pages: 17-42

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    Handle: RePEc:nrb:journl:v:25:y:2013:i:2:p:17-42

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    Related research

    Keywords: Money Supply; Monetary Policy; High-powered Money; Money Multiplier;

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    1. Nara Bahadur Thapa, 1997. "The Money Supply Function in Nepal," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 9, pages 44-65, April.
    2. Sanusi, Aliyu Rafindadi, 2010. "An empirical analysis of the money supply process in Ghana: 1983-2006," MPRA Paper 29494, University Library of Munich, Germany, revised 2010.
    3. Michelle R. Garfinkel & Daniel L. Thornton, 1991. "The multiplier approach to the money supply process: a precautionary note," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 47-64.
    4. Kevin S. Nell, 1999. "The Endogenous/Exogenous Nature of South Africa's Money Supply Under Direct and Indirect Monetary Control Measures," Studies in Economics 9912, Department of Economics, University of Kent.
    5. Yi, Gang, 1992. "The money supply mechanism and monetary policy in China," Journal of Asian Economics, Elsevier, vol. 3(2), pages 217-238.
    6. Alfonso Palacio Vera, 2001. "The Endogenous Money Hypothesis: Some Evidence from Spain (1987-1998)," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 23(3), pages 509-526, April.
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