Monetary Policy Transmission in Nepal: A Study of How Central Bank Policy Rates Affect Bank Lending and Economic Activity

Monetary policy transmission, the mechanism through which the monetary policy of the central bank impacts bank lending rates and, by extension, the broader economy, is of great interest to policymakers. This paper provides an in-depth analysis of the monetary policy transmission mechanism in the Nepalese context. It focuses on the interest rate pass-through channels and associated frictions in the Nepalese monetary policy framework. It uses the information published by NRB, the central bank of Nepal, as well as scholarly research and reports on the topic to perform the study. It highlights that the interest rate pass-through in Nepal is partial and delayed and discusses the reason why monetary policy transmissions in Nepal work as they do. The paper starts with an introduction to the topic of monetary policy transmission. Then, it proceeds to discuss research questions and objectives, theoretical background, and methodological background. Finally, it presents data analysis and discusses the findings to reach final conclusions and recommendations.