Trade liberalisation in fixed and flexible exchange rate regimes: a CGE analysis for Nepal

Abstract

This paper uses a computable general equilibrium model applied to social accounting matrix database to assess the macroeconomic and distributional impacts of trade with and without exchange rate (EXR) liberalisation in a small, developing and transition economy of Nepal. We implement trade liberalisation simulations under two scenarios: fixed EXR but endogenous foreign savings and flexible EXR but exogenous foreign savings. The second scenario is again subdivided into two parts – higher foreign savings as per the inference of the first scenario, and the constant foreign savings. We conclude that the economy undergoes contraction if import, export and exchange rate liberalisations are all implemented simultaneously. However, if currency appreciation and higher foreign saving inflow are controlled, the overall growth impact is still positive, but additional policy measures are necessary to make the impacts pro-poor.