Relationship Between Inflation and Money Supply in Nepal

Abstract

This study examines short term and long term effect of money supply on the inflation in Nepal during 1975-2019. The variables considered are consumer price index of Nepal, broad money supply, real GDP, nominal GDP, budget deficit, exchange rate and Indian consumer price index. The regression results from Engle-Granger Co-integration test and Error Correction model suggest that money supply has significant relation with inflation in both short and long run. However, money supply has higher impact in short run compare to long run. The result are consistent with classical Quantity theory of money and monetarist hypothesis on inflation.