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An Application of Cointegration and Error Correction Modelling: Towards Demand for Money in Nepal

Listed author(s):
  • Ravindra Prasad Pandey

    (Nepal Rastra Bank)

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    This paper makes use of co-integration analysis and error-correction modelling techniques to examine the money demand function in Nepal. In addition to using the recently developed time series techniques, the rate of variables such as agricultural GDP, non-agricultural GDP, rate of return on savings deposits etc. are examined vividly. The co-integration test suggests that the demands for narrow money (m1) is co-integrated with agricultural as well as non-agricultural income and also with the interest rate on savings deposit. On the whole the study confirms the belief that a statistically robust demand for m1 can be estimated for Nepal using an error-correction dynamic specification as well as the variables under consideration. The empirical analysis of money demand function thus exhibits that demand for real money balance in Nepal is a stable and predictable function of a few variables.

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

    Volume (Year): 10 (1998)
    Issue (Month): (April)
    Pages: 19-43

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    Handle: RePEc:nrb:journl:v:10:y:1998:p:19-43
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