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Optimal Rate of Inflation in Nepal : An Empirical Investigation

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  • Bhatta, Siddha Raj

Abstract

This paper attempts to empirically examine the optimal rate of inflation for Nepalese Economy on the basis of annual data over the period 1975 to 2014. It employs the non-linear specification by Sarel (1996) and Conditional Least Squares Specification by Khan and Senhadji (2001) to estimate the optimal rate of inflation. The results from the study suggest that the threshold rate of inflation is 6 percent for the Nepalese case. When inflation is below this threshold, it does not have any significant effect on growth or it may have a slightly positive effect, whereas inflation has significant retarding effects on growth beyond the threshold. It is, thus, desirable to contain inflation to less than 6 percent to ensure that economic growth is unharmed by the pernicious effects of high inflation.

Suggested Citation

  • Bhatta, Siddha Raj, 2015. "Optimal Rate of Inflation in Nepal : An Empirical Investigation," MPRA Paper 96696, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:96696
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    References listed on IDEAS

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    1. Atish Ghosh & Steven Phillips, 1998. "Warning: Inflation May Be Harmful to Your Growth," IMF Staff Papers, Palgrave Macmillan, vol. 45(4), pages 672-710, December.
    2. T L A Leshoro, 2012. "Estimating the Inflation Threshold for South Africa," Studies in Economics and Econometrics, Taylor & Francis Journals, vol. 36(2), pages 53-66, August.
    3. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 407-443.
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    5. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February.
    6. Prakash Singh, 2010. "Searching Threshold Inflation for India," Economics Bulletin, AccessEcon, vol. 30(4), pages 3209-3220.
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    Cited by:

    1. Nepal Rastra Bank Research Department NRB, 2017. "Optimal Inflation Rate for Nepal," Working Papers id:12120, eSocialSciences.

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    More about this item

    Keywords

    Inflation; Growth; Optimal Inflation;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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