Abstract
This paper examines the impact of monetary policy on economic growth and inflation in Nepal. The impact on economic growth and inflation have been observed using monetary policy instruments/indicators such as CRR, bank rate, interbank rate, M1, M2, private sector credit based on quarterly data from first quarter of 2006 to fourth quarter of 2018. The impact on economic growth and inflation rate has been examined separately. The econometric methods like ADF test, ARDL Model, Bound Test, Error Correction Model, Residual Test and Stability test have been used in the study. The empirical results show that economic growth and inflation are influenced by monetary policy. CRR, bank rate, broad money and private sector credit are significant to have impact on economic growth. Likewise, money supply (M1 and M2) has impact on inflation. The result shows that it takes longer time to have impact of broad money and private sector credit on economic growth than on inflation.
Highlights
Maintaining price stability and stabilization of output around its potential level with the effective implementation of monetary policy is among the major mandates for the central bank in most countries
Error Correction Model This study examines the speed at which dependent variable returns to equilibrium as a result of a change in dependent variables
The error correction model based on the relationship between monetary policy to economic growth and inflation are tested in the study
Summary
Maintaining price stability and stabilization of output around its potential level with the effective implementation of monetary policy is among the major mandates for the central bank in most countries. It is a common practice to evaluate the performance of central bank based upon the capacity to achieve those mandated goals. In this sense, it is crucial for a central bank to measure the price and output effects of monetary policy. It is crucial for a central bank to measure the price and output effects of monetary policy It is a prime responsibility of a central bank to evaluate performance and make necessary reforms in policy practices . The degree of policy impact on the economy is determined by the mandate for central bank to work with single goal or multiple goals
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