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Remittanceand Trade Deficit Nexus in Nepal: A VECM Approach

Author

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  • Guna Raj Bhatta

    () (Nepal Rastra Bank)

Abstract

Once Nepal eased the access to the international labor market, there is an increasing trend of Nepalese working abroad, where annually thousands of young people migrate from the country. Consequently, there has been a sharp increment of remittance inflow in the recent years. Since remittance helps people improve the living standards, it has been observed as a good contributor for the poverty reduction in Nepal. Nevertheless, it might further deteriorate the trade balance, causing higher demand for consumable goods, most of which are imported in Nepal. Using cointegration techniques and a Vector Error Correction Model (VECM) based on the monthly data of merchandise import, worker's remittance and trade deficit for ten years period, this paper studies whether remittance causes the merchandise import and trade deficit to raise in the long run. The cointegration equation show that there is a long-run positive unidirectional causality from remittance to import as well as remittance to trade deficit implying that remittance causes merchandise import and deteriorates trade balance.

Suggested Citation

  • Guna Raj Bhatta, 2013. "Remittanceand Trade Deficit Nexus in Nepal: A VECM Approach," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 25(1), pages 37-50, April.
  • Handle: RePEc:nrb:journl:v:25:y:2013:i:1:p:37-50
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    File URL: http://www.nrb.org.np/ecorev/pdffiles/vol25-1_art3.pdf
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    References listed on IDEAS

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    1. Satis Chandra Devkota, 2004. "Impact of Exchange Rate Change on Foreign Trade Balance in Nepal," International Trade 0410003, EconWPA.
    2. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 39(3), pages 106-135.
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    Cited by:

    1. repec:kqi:journl:2017-1-6 is not listed on IDEAS
    2. Mohammad Reza Farzanegan & Sherif Maher Hassan, 2016. "How does the Flow of Remittances Affect the Trade Balance of the Middle East and North Africa?," CESifo Working Paper Series 6172, CESifo Group Munich.

    More about this item

    Keywords

    Trade deficit; Remittance; Nepal; Import; VECM;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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