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Exchange Rate Misalignment in Nepal

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  • Anjan Panday

Abstract

Nepal has a large and persistently growing trade deficit with India and an overall negative trade balance. Its economy is growing slowly relative to India’s, while the exchange rate is pegged with India at a parity that is believed to be overvalued. In this article, possible misalignment of Nepal’s real effective exchange rate is considered by estimating a behavioural equilibrium exchange rate, using a set of fundamentals for the period 1975–2008. The estimates from the Johansen (1988) cointegrated vector autoregression (VAR) model as well as a single-equation bounds-testing approach to cointegration suggest that Nepal’s trade-weighted real exchange rate was overvalued in the last decade-and-a-half.

Suggested Citation

  • Anjan Panday, 2014. "Exchange Rate Misalignment in Nepal," Journal of South Asian Development, , vol. 9(1), pages 1-25, April.
    • Handle: RePEc:sae:soudev:v:9:y:2014:i:1:p:1-25
    DOI: 10.1177/0973174113520581
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    References listed on IDEAS

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    1. Mr. Atsushi Iimi, 2006. "Exchange Rate Misalignment: An Application of the Behavioral Equilibrium Exchange Rate (BEER) to Botswana," IMF Working Papers 2006/140, International Monetary Fund.
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    4. Ronald Macdonald & Luca Antonio Ricci, 2004. "Estimation Of The Equilibrium Real Exchange Rate For South Africa1," South African Journal of Economics, Economic Society of South Africa, vol. 72(2), pages 282-304, June.
    5. Edwards, Sebastian, 1988. "Real and monetary determinants of real exchange rate behavior: Theory and evidence from developing countries," Journal of Development Economics, Elsevier, vol. 29(3), pages 311-341, November.
    6. Mr. Ronald MacDonald & Mr. Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals: A Methodological Comparison of BEERs and FEERs," IMF Working Papers 1998/067, International Monetary Fund.
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    Cited by:

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