Abstract
This paper attempts to empirically investigate the presence of a cointegrating relationship between the exports, imports, and the USD exchange rate in Nepal using the yearly time series data from 1965 to 2017. Time series properties of the data are diagnosed using the Augmented Dickey-Fuller unit root test and Johansen's multivariate cointegration test. The findings indicate that there exists no cointegrating relationship between exports, imports, and the USD exchange rate in Nepal, and hence, no causal relationships within vector error correction model (VECM) can be estimated for Nepal. The lack of cointegration implies that macroeconomic policies of Nepal have been ineffective in bringing exports and imports in long-run equilibrium, and thus, Nepal is in violation of her international budget constraint. These findings may have important implications for decision- making by national policymakers.Keywords: Exports, Imports, International Budget ConstraintJEL Classifications: F41, C22, C32DOI: https://doi.org/10.32479/ijefi.7588
Highlights
The knowledge of a cointegrating relationship between exports and imports is essential for the design and evaluation of current and future macroeconomic policies aimed at achieving trade balance (Arize, 2002)
The evidence of no cointegration indicates that the balance-of-payments crisis was not sustainable, and Nepal is in violation of her international budget constraint
To the best of our knowledge, no previous study has investigated the presence of cointegration and possible long-run equilibrium relationship between the exports, imports, and the USD exchange rate using the most recent data from Nepal
Summary
The knowledge of a cointegrating relationship between exports and imports is essential for the design and evaluation of current and future macroeconomic policies aimed at achieving trade balance (Arize, 2002). Presence of such a relationship between exports and imports implies that the countries are not in violation of their international budget constraints, because their macroeconomic policies have been effective in driving exports and imports into longrun equilibrium (Herzer and Nowak-Lehman, 2006). We would like to investigate the effectiveness of Nepalese macroeconomic policies in driving exports and imports towards long-run equilibrium by testing if exports and imports measured in current Nepalese rupee are cointegrated. The study of cointegration and causality between the exports, imports, and the USD exchange rate holds significant importance and draw the attention of researchers
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