Estimating production function using time-series analysis in Nepal
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Department of Economics
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.