Relationship Between Inflation and Economic Growth in Nepal

Abstract

Like several other countries, one of the central objectives of the macroeconomic policy in Nepal is to sustain high economic growth with low level of inflation. However, there has been substantial debate on whether inflation promotes or harms economic growth. Thus, this study has empirically explored the relationship between inflation and economic growth in the context of Nepal. Time series data for the period of 1974-2017 has been used. According to the result of the study inflation is negatively related with economic growth in Nepal and vice versa. However, there is uni-directional causality between inflation and economic growth. That means, economic growth does not cause inflation in Nepal. This study also revealed that foreign sectors have dominance role in causing the inflation in Nepal. Specially, Indian prices are the cause of inflation in Nepal. Keywords: Inflation, Economic Growth, Unit Root, Granger Causality