Abstract
This paper examines the implications of Nepal's exchange rate policy for its export performance over the period 1980–2010. We first document Nepal's long-standing currency peg against the Indian rupee and that Nepal's real exchange rate appreciated substantially from the late 1990s. We then employ a gravity modeling approach to confirm that this real exchange rate appreciation has adversely affected Nepal's exports, especially to third-country markets. Nepal's exchange rate-related export competitiveness trap provides a motivation to reconsider the current peg.
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