The Impact of Monetary Policy on Economic Growth in Nepal: An Empirical Analysis

This research study investigates the impact of monetary policy on economic growth in Nepal. Data was taken from the sources of national account of World Bank from the year 1965 to 2020 for this purpose. Augmented Dickey- Fuller unit root test was performedto avoid spurious regression. Johansen co-integration test was applied after conforming all variables were integrated in order I (1) then Vector Error Correction model was used to find out the speed of adjustment towards long run equilibrium. The coefficient of VECM was negative and significant that shows long run relationship between monetary policy and GDP Growth. Granger Causality results show two-way causality between money supply andGDP Growth. The result supports the impact of monetary policy on economic growth of the country. It can reduce unemployment, promote investments and stabilize the economy so monetary authorities and policy makers should focus on healthy monetary policy for economic growth of the country. money supply, openness and government expenditure as variables and used co-integration and error correction model as the method. Nouri et al. (2011) carried out a research study to examine the impact of money supply on economic growth by using money supply and economic growth as variables, and ordinary least square as the method. It depicted that money supply had positive impact on economic growth. Chang et al. (2013) carried out a research study to find out the economic growth and social welfare implication of monetary policy by taking per capita consumption, per capita money holding, and price level as variables, and the standard endogenous growth model as the method. The study showed that the expansion in money supply decreased the fertility and increase economic growth. Chaitip et al. (2015) conducted a research study to find out the influence of money supply on economic growth by taking money supply, demand deposit, and GDP Growth as variables, and panel unit root, ARDL model, pooled mean group estimator as the method. The study revealed that money supply was associated with economic growth. The purpose of a research study carried out by Klotz et al. (2014) was to shed light on the role of China’s on global price. Their research study involved global commodity prices, economic activity and monetary policy as variables and granger causality and generalized impulse response functions as the method. The study revealed that economic activity granger caused both energy and metal prices. Hussain et al.(2017) carried out a research study to assess the impact of broad money supply on per capita growth of GDP by holding money supply, per capita GDP and real interest rate as variables, and VECM Model as the method. The result showed that the money supply had significant impact on per capita GDP.Doan- Van(2020) conducted a research study to find out the impact of money supply and inflation on economic growth by taking the money supply, CPI and GDP as variables and Correlation and t- test for analysis. The research study showed that the money supply and inflation were closely associated and money supply directly affected economic growth. The study carried out by Li et al. (2020) with the purpose of measuring the monetary as independent variables to show the long run and short run relationship. The study applies Johansen co-integration test to find long run relationship between the variables. It is used after Augmented Dickey- Fuller unit root test to remove the effect of spurious regression in the model. All variables are found non- stationary at level and found stationary at first difference so that Johansen co-integration test is implied to test the co-integration. After conforming all variables are integrated in I (1) order then vector error correction model is used to find the speed of adjustment in the short run towards long run equilibrium. The coefficient of VECM is negative (-0.181244) and significant at 5% significance level that shows the model is adjusting by 18.12% towards long run equilibrium. It is the evidence of long run relationship between monetary policy and economic growth of the country. The results of granger causality show the direction of causality between the variables. Money supply and foreign exchange reserve have two-way causality with GDPgrowth and one-way causality exist from exchange rate to GDP growth but no causality is obtained between gross capital formation and GDP.It is found that all variables granger cause GDP but gross capital formation does not show the direction of causation with GDP growth. The result of various test proves the short run and long run relationship between monetary policy and economic growth that shows monetary authorities and policy makers should focus on these variables for the sound economic growth of the country. Central bank should focus on short run and long run monetary policy for economic growth(Mahara, 2020). Increase in broad money supply in a certain threshold level is healthier for economic growth of the country (Joshi, 2021). Policy makers should emphasize on economic growth through long run policies and monetary policy mechanism.