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Optimal Inflation Rate for Nepal

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  • Nepal Rastra Bank

    (Nepal Rastra Bank, Research Department)

Abstract

This paper estimates the optimal inflation rate in Nepal based on the data of the period 19782016. The novelty of the analysis is that it probes possible nonlinearity of the hypothesized impact of inflation on economic growth using alternative specifications. The results suggest that there exists a threshold effect of inflation. The Ordinary Least Squares method estimates the turning point of inflation to be 6.25 percent while that of the Hansen (2000) method shows the threshold level to be 6.40 percent. The maximum impact on growth associated with the turning point, and at the mean levels of other explanatory variables is quite high at 4.59 percent. The results suggest that Nepal should adopt an inflation target range around the computed optimal inflation rate to lower the inflation expectation and enhance economic growth.

Suggested Citation

  • Nepal Rastra Bank, 2017. "Optimal Inflation Rate for Nepal," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 29(1), pages 1-18, April.
    • Handle: RePEc:nrb:journl:v:29:y:2017:i:1:p:1
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    Cited by:

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    2. Hans-Eggert Reimers & Dieter Gerdesmeier & Barbara Roffia, 2023. "Investigating the Inflation–Output Nexus for the Euro Area: Old Questions and New Results," Economies, MDPI, vol. 11(11), pages 1-15, October.

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    More about this item

    Keywords

    Optimal inflation; threshold inflation; exchange rate overvaluation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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