The Effect Of Money Supply On The Economy Of Nepal Essay

The Effect Of Money Supply On The Economy Of Nepal Essay

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From the national data of inflation, it is observed that Nepalese general price level is rising at a higher rate in every month without delay. Due to the higher inflation, the economy is affected adversely at micro as well as macro level. The rise in price arises by different factors, of which the present study is confined in analyzing the role of money supply to cause inflation in the economy of Nepal. The present study is the empirical analysis on the relationship between money supply and price level in the spirit of Quantity Theory of Money. The present study aims at providing the guidelines to policy makers to formulate suitable policy in stabilizing the price in Nepal.
From the policy makers point of view two important aspects are of particular interest. The first aspect is the time it takes for changes in the rate of money growth to work through to the rate of inflation which is long and variable. The second aspect is the market short-run impact of changes in money growth on real variables such as income and employment. These two aspects have important implications for monetary policy.
Since the monetary policy of Nepal has the single objective of price stability in the country. If there is quick response of inflation to a monetary change, it will be fruitful to take a short time anti-inflationary monetary policy to mitigate with the inflation. The monetarists can formulate the policies accordingly so as to control inflation immediately. On the other hand, if there is a slow response of inflation to a monetary change, it is necessary to take a long-time anti-inflationary monetary policy to formulate. In such a situation, quick monetary remedies for inflation do not exist.
According to quantity theorists the appropriate way ...

... middle of paper ...

... new one. However, it is a cornerstone to Nepalese context that this study analyzes the empirical relationship between money supply and price level intensively applying modern econometric tools. The tools used in the present study bear the robust relationship between the variables under study.
- Many researchers have explored the relationship between money supply and price level applying the econometric tools, but these studies do not include the diagnostic tests of the employed tools. Without diagnostic tests, the relationship between the variables may or may not be robust. However, the present study confirms the robustness of the relationship between money supply and price level through diagnostic test.
- No generalization is made on the basis of single test, but the association between money supply and price level is generalized with the help of different tests.

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