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Abstract
This paper examines the current status of “Monetary policy for sustainable development of Nepal’s Economy”. Nepalese economy have been facing unexpected and frequent high inflation, volatility of interest rate, liquidity issues, stagnant equity market, unemployment and foreign immigration, incremental trade deficit and growth rate. Therefore, this paper estimates the major financial and macroeconomic components and their effect to the sustainable economic development in Nepal based on the data of the period 2001/2–2016/17. The novel outcome of the analysis is that it probes possible nonlinearity of the hypothesized impact of dual component on economic growth using alternative specifications. The results suggest that there exists a threshold effect of Financial Component like Dsaving (Domestic Saving) - Dcredit (Domestic Credit) ,WorkerRMT (REMMITANCE)- intRate ( interest rates) and DspINCOME (Disposable Income) - Part I and Macro-economic component like ( GDP, CPI, Inflation, Interest rates, BOP and Investments - part II in the Nepalese Economy, probably covers major factors which constitute the effectiveness of Monetary policy of Nepal since it has come into effect (inception year) 2001/02 ,therefore study covers the period from 2001-2002 to 20015-16 for quantitative analysis purposes. The starting period 2001/02 is chosen because of two reasons: (a) the main study objective, effectiveness of Nepalese monitory policy since it has come into the affect in the year 2001. (b) The major performance and changes in financial system took place and adequate availability of a data is the other reason too. The empirical results show that domestic savings exerted positive influence on both the economic activity and monetary account of the balance of payments even in the disturbed period (FY 2001 to FY 2016). At the same time, it appears that M1 and M2 could not play any meaningful role. The credit policy seems to be more effective and important in Nepal at present. As the credit policy affects the cost, availability and allocation of credit,The liquidity ratio of the commercial banks always remained higher side of total deposits after FY 2001/02, one or two percent increase in the Compulsory Reserve Requirement (CRR) does not decrease or stop the increment in credit. The ratio of Agricultural Output to GDP has dampening effect on price rise, whereas the Wholesale Prices of India (WPI) has significant influence on price rise in Nepal. There is no way to shield or reduce the effect of WPI on the Consumer Price Index (CPJ) in Nepal. Rise in CPI can be dampened by increasing the agricultural production .Though there is positive expectation and probabilities of normal distribution and growth of macroeconomic indicators ,The Graphical representation and analysis clearly state the immediate need of drafting sustainable monetary policy as the there is unexpected deviation and irrational relationship among variables. It has also raised serious concern about efficient implementation and execution mechanism of regularity authority towards achieving development mission of the country. Whereas from the perspective of Monetary instrument and their interaction , it is concluded that so far inflation has no adversely affect on the economy of Nepal which is a result of controlled or effective supply of money (M2) by NRB. This study reveals the impact of money supply (M2) on the GDP of Nepal , whereby we have seen inflation rate is hovering towards double digits. We have considered few of the macro indicators they are interest rate,CPI , inflation rate, investment and consumption because money supply is affected either one of them. By using regression model, it is proved that almost all the variable have significant relation with GDP of Nepal.