Estimating production function using time-series analysis in Nepal

Abstract

Examining the long-run equilibrium of a country along with identification of significant policy instruments is essential for a developing country like Nepal which has struggled to utilize its production and export potential. A country requires different fiscal and monetary instruments so that long-run equilibrium can be maintained in an economy. Since a growth model includes all the necessary inputs that is required to maintain a long-term growth, this study utilizes an endogenous growth model so that the long-run equilibrium can be assessed and significant determinants of national output can be pointed out. We incorporate time series dataset from 1975 to 2018 obtained from the quarterly bulletin of Nepal Rastra Bank except for export and net import which were taken from Ministry of Finance’s macroeconomic dashboard. We find stable long run equilibrium explaining the economic growth in Nepal. We also find that gross fixed capital formation, export and domestic credit increases national output in the long-run. Thus, it is necessary for a low-income country like Nepal to utilize its investment and production potential in economic growth. Moreover, domestic credit plays an instrumental role to increase the production in Nepal. Even though export accounts for just 3.3% of the GDP as compared to imports (36% of GDP), our results are robust to explain that export is one of the major policy determinants to expand the national output.