Determinants of Inflation in Nepalese Economy

Abstract

The major objective of this study is to analyze the determinants of the inflation in Nepalese economy. The study is based on time series secondary data over the period from 2001 to 2015. Inflation can be measured through CPI (inflation from the perspective of consumers) and WPI (from the perspective of producers). This study hypothesizes that the inflation depends on various macroeconomic factors including GDP growth rate, broad money supply, exchange rate, interest rate, budget deficits, unemployment, Indian inflation, and remittances inflow. The main findings of this thesis are derived by analyzing the relationship between the inflation (CPI and WPI) and these macroeconomic variables. SPSS software is used to analyze the secondary data which includes descriptive statistics, correlation analysis and least square regression analysis. Based on the analysis of the data, the major findings of this thesis are that CPI oriented inflation is positively correlated with all explanatory variables (except unemployment rate); and WPI oriented inflation is positively related with all variables except foreign exchange rate and unemployment rate. Based on the findings of the thesis, this study recommends that if the government of Nepal and NRB wish to control inflation, there should be control of excessive money circulation in the economy, control of exchange rate, decrease the bank rate, give up deficit financing and adopt anti-inflationary budgetary policy, generate employment opportunities, apply appropriate tools and techniques to control Indian inflation, utilize remittances in productive sectors to boost the economy, and effort should be targeted to increase GDP growth rate