Optimal Rate of Inflation in Nepal : An Empirical Investigation

Bhatta, Siddha Raj (2015): Optimal Rate of Inflation in Nepal : An Empirical Investigation. Published in: Conference Proceeding of Nepal Rastra Bank No. 2015

Abstract

This paper attempts to empirically examine the optimal rate of inflation for Nepalese Economy on the basis of annual data over the period 1975 to 2014. It employs the non-linear specification by Sarel (1996) and Conditional Least Squares Specification by Khan and Senhadji (2001) to estimate the optimal rate of inflation. The results from the study suggest that the threshold rate of inflation is 6 percent for the Nepalese case. When inflation is below this threshold, it does not have any significant effect on growth or it may have a slightly positive effect, whereas inflation has significant retarding effects on growth beyond the threshold. It is, thus, desirable to contain inflation to less than 6 percent to ensure that economic growth is unharmed by the pernicious effects of high inflation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Inflation, Growth, Optimal Inflation
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

References

Barro, R. J. 1991. “Economic Growth in a Cross Section of Countries.” The Quarterly Journal of Economics. 106(2), 407–43. Barro, R. J. 1995. “Inflation and Economic Growth.” National Bureau of Economic Research (NBER) Working Paper No. 5326. October. Bhusal, T. P., & Silpakar, S. 2011. “Growth and inflation: Estimation of Threshold Point for Nepal.” Economic Journal of Development Issues, 13&14(1-2), 131-138. Bruno, M.; W. Easterly, W. 1998. “Inflation Crises and Long-Run Growth.” Journal of Monetary Economics. No 41, pp.3-26. Chan K. and Tsay R. 1998. “Limiting Properties of the Least Squares Estimator of a Continuous Threshold Autoregressive.” Biometrika, No. 45, 413-426. Espinoza, R., Leon, H., & Prasad, A. 2010. “Estimating the Inflation-Growth Nexus— A Smooth Transition Model.” IMF Working Papers, WP/10/76. Fisher, S.1993. “The Role of Macroeconomic Factors in Growth.” Journal of Monetary Economics 32(3), pp. 485-511. Ghosh, A and Phillips, S. 1998. “Warning: Inflation may be Harmful to Growth.” IMF Staff Papers. Vol.45, No.4. Pp.672-710. International Monetary Fund Hansen, B. 2000. “Sample Splitting and Threshold Estimation.” Econometrica, Vol. 68 (May), pp. 575–603. Husaain S. and S. Malik. 2011. “Inflation and Economic Growth: Evidence from Pakistan.” International Journal of Economics and Finance. Vol.3, No.5. Khan, M and Senhadji, A. 2001. “Threshold Effects in the Relationship between Inflation and Growth.” IMF Working Paper WP/00/110. Leshoro, T.L.A. 2012. “Estimating the Inflation Threshold for South Africa.” Economic Research South Africa (ERSA) Working Paper No. 285. Mohanty, D. Chakraborty, A. B., Das, A. and John, J. 2011. “Inflation Threshold in India: An Empirical Investigation.” Reserve bank of India Working Paper Series, 18. 2 nd International Conference on Economics and Finance

500 Mubarik, Y. 2005. “Inflation and Growth: an Estimate of the Threshold Level of Inflation in Pakistan.” SBP Research Bulletin. Vol.1. No.1. Nepal Rastra Bank. 2007. Inflation in Nepal. Rangarajan, C. 1998. “Development, Inflation and Monetary Policy.” in I. S. Ahluwalia and I M D Little (eds), India's Economic Reforms and Development (Oxford University Press: New Delhi), 48–72. Reserve Bank of India. 1985. “Report of the Committee to Review the Working of the Monetary System.” (Chairman: Sukhamoy Chakravarty), Mumbai. Romer, D. 1993. “Openness and Inflation: Theory and Evidence.” The Quarterly Journal of Economics 108(4), 869–903. Sala-i-Martin, X. 1997. “I Just Ran Four Million Regressions.” NBER Working Papers number 6252. Samantaraya, A., & Prasad, A. 2001. “Growth and Inflation in India: Detecting the Threshold level.” Asian Economic Review, 43, 414–420. Sarel, M (1996). “Non-linear Effects of Inflation on Economic Growth.” IMF Staff Papers. Vol.43. Pp. 199-215. Singh, Prakash. 2010. ''Searching Threshold Inflation for India.'' Economics Bulletin, Vol. 30 no.4 pp. 3209-3220. United Nations, Department of Economic and Social Affairs, Population Division. 2011. World Population Prospects: The 2010 Revision, Volume I: Comprehensive Tables.ST/ESA/SER.A/313. Vasudevan, A., Bhoi B. K., & Dhal S. C. 1998. “Inflation Rate and Optimal Growth: Is There a Gateway to Nirvana? In A. Vasudevan (ed.), Fifty Years of Developmental Economics: Essays in Honor of Prof. Brahmananda (Mumbai: Himalaya Publishing House), 50–67. Younus S. 2012. “Estimating Growth-inflation Tradeoff Threshold in Bangladesh.” Bangladesh Bank Working Paper Series: WP 1204.