Abstract
By equalizing rates of return across sectors, financial liberalization improves efficiency and equalizes the distribution of income. Efficiency gained in the allocation of resources increases capital usage more in previously heavily repressed sectors such as agriculture and textile, allowing up to a 19 percent expansion in production and employment. The savings and investment responses, degree of factor substitutions, are higher in the complete liberalization than in partial or piecemeal liberalization. Income, consumption, utility and overall welfare of rural and urban households increase. Liberalization is not effective if savings are used in accumulations of unproductive assets i.e. gold, jewellery, urban land, and foreign exchange. Financial liberalization improves the distribution of income by raising the wage rate of rural labor than for urban labor as rural labour-intensive sectors invest more with increased access to financial institutions and demand more labor to complement additional capital employed in these sectors.
Highlights
Nepal went through a series of conflicts and tensions over last 20 years
Policy experiment that has greater value of UW h is more desirable than the one with lower one. We can use this model to study the behaviour of output, employment, capital accumulation and overall and sectoral prices for a fairly decentralized open economy. This advancement in numerical analysis of an economy is made possible by the development of MPSGE/GAMS software and algorithms to solve the mixed-complementary problem with nested functions, computation of a standard model with a more elaborate specification is not a problem (see Rutherford, (1995))
Effort is made to answer questions raised in the introduction section based on the dynamic computable general equilibrium (CGE) model calibrated to the Nepalese economy
Summary
Nepal went through a series of conflicts and tensions over last 20 years. the system of governance has changed and the awareness for economic growth and redistribution have improved substantially. A forward-looking multi-sectoral computable general equilibrium (CGE) model of Nepal with financial intermediation is developed to find the economy-wide long-run consequences of financial sector liberalization in the Nepalese economy This model is an appropriate tool to study welfare and redistribution consequences of financial sector reform to households and producers in a developing economy. While numbers of financial institutions, the cost of funds, the volume of savings and investment, assets and liabilities and freedom of financial institutions on the allocation of credits are important measures used to ascertain the degree of competition in the financial system, these measures alone are not sufficient to evaluate wide ranging welfare and redistributive effects of reform.
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