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Monetary Neutrality in the Nepalese Economy during 1975-2008

  • Mukesh Khanal

    ()

    (Institute for Integrated Development Studies (IIDS), Kathmandu)

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    One of the methods of measuring the effectiveness of monetary policies is via inspection of monetary neutrality in the economy. It is a concept from classical economics and it suggests that changes in nominal variables do not have any impact on real variables. This paper studies the presence or absence of effective monetary policy in Nepal between 1975 and 2008 by observing money supply (nominal side), and real GDP (real). Results suggest that an increase in money supply immediately lowers the real GDP in the short run, but has no effect on real GDP in the long run. This evidence suggests that Nepal Rastra Bank’s monetary policies between 1975 and 2008 may have been counter-productive in the short-run, but they were effective for long-run growth and stability of the Nepalese economy.

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    File URL: http://www.nrb.org.np/ecorev/pdffiles/vol23-1_art5.pdf
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    Article provided by Nepal Rastra Bank, Research Department in its journal NRB Economic Review.

    Volume (Year): 23 (2011)
    Issue (Month): 1 (April)
    Pages: 71-91

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    Handle: RePEc:nrb:journl:v:23:y:2011:i:1:p:71-91
    Contact details of provider: Web page: http://www.nrb.org.np/ecorev/
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    1. Nephil Matangi Maskay Ph.D. & Rajendra Pandit, 2009. "Interest Rate Pass-Through in Nepal," NRB Working Paper 05/2009, Nepal Rastra Bank, Research Department.
    2. Jacobson, Tor & Jansson, Per & Vredin, Anders & Warne, Anders, 1999. "A VAR Model for Monetary Policy Analysis in a Small Open Economy," Working Paper Series 77, Sveriges Riksbank (Central Bank of Sweden).
    3. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
    4. Ryuzo Miyao, 2004. "Use of Money Supply in the Conduct of Japan's Monetary Policy: Reexamining the Time Series Evidence," Discussion Paper Series 163, Research Institute for Economics & Business Administration, Kobe University.
    5. Lucas, Jr., Robert E., 1995. "Monetary Neutrality," Nobel Prize in Economics documents 1995-1, Nobel Prize Committee.
    6. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
    7. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    8. Cripps, Francis, 1977. "The Money Supply, Wages and Inflation," Cambridge Journal of Economics, Oxford University Press, vol. 1(1), pages 101-12, March.
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