IMPORTANCE OF MONETARY POLICY FOR ECONOMIC GROWTH IN

NEPAL

A Seminar paper

By
Abina Gurung
TU Regd No:- 7-2-288-1-2022

Symbol No:- 33201/22

Bachelor in Business Administration (BBA)

Second Semester
Seminar on Contemporary Issues of Macroeconomics (ECO 205)

Submitted to
BBA Department
Aadikavi Bhanubhakta Campus
Tribhuwan University

Jan, 2024

i
 Recommendation Letter

This is to certify that the seminar paper on contemporary macroeconomic issues entitled
IMPORTANCE OF MONETARY POLICY FOR ECONOMIC GROWTH IN
NEPAL is an academic work done by Abina Gurung submitted in the partial fulfillment
of the requirement for the degree of Bachelor of Business Administration (BBA) at
Faculty of Management, Tribhuwan University under my guidance and supervision. To
the best of my knowledge, the information presented him/her in the seminar paper has not
been submitted earlier.

………………………..
Signature of Supervisor
Name of the Supervisor
Lecturer
Date:

ii
TABLE OF CONTENT
Content Page no.
Title i
Recommendation Letter ii
List of Table iv
List of Figure v
Abbreviation vi
CHAPTER I: INTRODUCTION 1
1.1 Background of the Paper 1
1.2 Statement of the Problem 2
1.3 Objectives 3
1.4 Methodology 4
1.5 Structure of the Paper 4
CHAPTER II: DESCRIPTION AND ANALYSIS 5

2.1 Literature Review 5

2.2 Data Presentation and Analysis 11
2.3 Findings 12
CHAPTER III: CONCLUSION 13
3.1 Conclusion 13

References

iii
 List of Table

Table no. Title Page no.

1 Summary Table 10
2 Change in inflation rate and money supply growth. 13

iv
Abbreviations
NRB Nepal Rastra Bank

GDP Gross Domestic Product

LM Liquidity-money

INR Indian currency

v
 CHAPTER I
INTRODUCTION

1.1 Background of the Paper

Thomas (2023) stated monetary policy as a set of tools used by a nation's central bank to
control the overall money supply and promote economic growth and employ strategies
such as revising interest rates and changing bank reserve requirements. Similarly,
Kimberly (2022) defined monetary policy is a central bank's actions and communications
that manage the money supply. Central banks use monetary policy to prevent inflation,
reduce unemployment, and promote moderate long-term interest rates. Monetary policy is
how a country’s central bank manages money supply and interest rates to control
inflation and promote economic stability.

Joshi (2022) described the Monetary policy has a significant impact on the economic
growth of Nepal. The study analyzed data from 1965 to 2020 and found that there is a
long run relationship between monetary policy and GDP growth. The study also supports
the role of monetary policy in reducing unemployment, promoting investments, and
stabilizing the economy. Mehar (2023) stated a usual way to test the effectiveness of
monetary policy is to test the impacts of interest rates on GDP growth, investment and
inflation. The traditional Liquidity-money (LM) curve approach is also adopted to
explain the implications of monetary policy.

NRB (2015) examined monetary policy in Nepal started with the establishment of NRB
in 1956; NRB was established under NRB Act 1955. At the time, both Nepalese and
Indian currency were in Circulation. To remedy this, and to establish Nepalese currency
as the only currency for domestic transactions, Foreign Exchange Act 1962 was
introduced. The history of monetary policy in Nepal dates back to the 1960s. The NRB
has been introducing various forms of monetary policy and strategies since then. The
Nepalese monetary policy is important from the policy perspective. Since 2002, the NRB
has formally announced its monetary policy, but its framework remains unchanged.

1
NRB's careful calibration of monetary policy instruments helps maintain external
stability, a vital foundation for sustainable economic growth.

Ghimire (2006) states that before the introduction of monetary policy in Nepal, the NRB
used direct monetary instruments such as interest rate, margin rate, and statutory reserve
requirements (SLR) to regulate the flow of money and there was widespread use of
Indian currency (INR), and transactions were done in dual currencies. The dual currency
system in the 1950s, in which both the India and the Nepalese currency were in
circulation, was eliminated by the establishment of NRB.

Joshi (2022) explain that monetary policy is a powerful tool that can be used to influence
the economy of a country. In Nepal monetary policy has been used to promote economic
growth, reduce unemployment, and stabilize the economy. It can have significant effects
on economic growth and development in Nepal. Here are some of the advantages of
monetary policy for Nepal. Monetary policy can help to reduce unemployment by
promoting investment and promote economic growth by encouraging lending and
investment and also help to stabilize the economy by controlling inflation and ensuring
price stability. Some disadvantages of monetary policy for economic growth is if
monetary policy is too restrictive, it can lead to a decrease in economic activity and
growth, If the policy is too expansionary, it can lead to inflation and other economic
problems and it is also difficult to implement monetary policy effectively in developing
countries like Nepal.

The importance of monetary policy in Nepal's economic journey cannot be overstated. As

the NRB navigates the intricate web of challenges and opportunities, its effective
execution of monetary policy holds the key to unlocking sustainable economic growth
and prosperity for the nation.

1.2 Statement of the Problem

Adhikari (2022) analyzed the monetary policy for 2022/23 formulated by NRB. This
article examined the framework targets and majors of the monetary policy. The main
objective of this study was to review the monetary policy of 2021/22 and its

2
achievements and challenges. By using the statistical tables and appendices the study
found that, maintaining the price and external sector stability promote macroeconomic
stability and support economic growth.

Wagle (2022) examined the Nepalese economy has also been affected directly and
indirectly by recent developments in global economy. The current economic indicators of
Nepal are alarming with high inflation. The pressure on price and external sector
stability as well as the contraction in the supply of loanable fund have created a challenge
for Nepal in its path to economic recovery from the pandemic including achieving high
economic growth.

Joshi (2022) examined that Nepal faces some challenges and limitations in implementing
effective monetary policy where some of the factors that hinder the effectiveness of
monetary policy such as financial underdevelopment, external shocks and political
instability. The main objective of this study was to improve the monetary policy
framework and enhance its impact on economic growth. The findings from this study was
monetary policy has positive impact on economic growth in both long run and short run.
The following question can be raised from given objective :
 How monetary policy is framed change in money supply of Nepal's
economic growth?
 How inflation rate is affected in Nepal's economic growth?
1.3 Objectives

Based on the identified questions and issues surrounding the importance of monetary
policy in Nepal, this paper aims to achieve the following objectives:
 To analyze the money supply of Nepal in economic growth.
 To evaluate the change in inflation rates of Nepal.

By achieving these objectives, this paper aspires to offer valuable insights and actionable
recommendations for policymakers, researchers, and stakeholders interested in
strengthening the role of monetary policy in Nepal's economic journey.

3
1.4 Methodology

The paper is based on secondary data and descriptive format. Descriptive research design
is applied to analyze the data. All analyze and discussion are based on published sources
of secondary data published sources of secondary data published in the NRB, monetary
policy of Nepal FY 2022/23, and so on. Some descriptive statistics such as percentage
used to explain the impact of monetary policy for economic growth.

1.5 Structure of the paper

This paper is classified into three parts i.e. Introduction, Description and Analysis and
different sub topics and they are background of the study, Statement of the problem,
Objectives, Methodology and structure of the paper. Similarly, description and analysis
contains three different sub topics and they are literature review, data presentation and
analysis, and findings and finally conclusion and implications.

4
 CHAPTER II
DESCRIPTION AND ANALYSIS

2.1 Literature Review

A literature review is an key part of research writing. It involves reviewing and analyzing
existing published works, such as books, articles, and scholarly papers, that are related to
the research topic. The purpose of a literature review is to provide a comprehensive
overview the current knowledge and research gaps in your field of study. It helps you
identify key theories, concepts, methodologies, and findings that have been explored by
other researchers. By conducting a literature review, you can build a strong foundation
for your own research and contribute to the existing body of knowledge.

Conceptual Review

McPhail (2000) examined that broad money is a term that refers to a broad range of
monetary assets that are available to the public for spending and saving. Broad money
usually includes cash, coins, checking accounts, saving accounts, and other highly liquid
forms of money. There are different definitions of broad money may include other less-
liquid assets such as term deposits, mutual funds, or other financial instruments. Broad
money is often used as an indicator of inflation and economic activity.

Dutkowsky et al. (2006) analyzed that narrow money is a concept of money supply that
includes the most liquid forms of money, such as currency, demands deposits, and
traveler’s checks. Narrow money is also known as M1 in the united stated and mother
countries that use the same classification system. Narrow money is used for transactions
and medium of exchange, rather than for saving or investing.

Empirical Review

Rasche and Williams, (2005) discussed the inflation targeting as an effective monetary
policy that aims to achieve a numerical inflation target through transparent and forward-

5
looking monetary policy rules. The main objective of the article is about the monetary
policy to address changing views of the role and effectiveness of monetary policy, and
discuss some of the challenges and issues that arise in implementing and evaluating
monetary policy. The study utilizes secondary data obtained from various sources,
including econometric models, statistical tests, and data visualization. By analyzing the
article we found that the article reviews some of the practical problems and complications
the central banks face in conducting monetary policy, such as the choice of policy
instruments, the transmission mechanism, the measurements of inflation and output, and
the communication of policy goals and actions. The concluded that monetary policy is a
complex and evolving field that faces challenges and trade-offs in achieving its goals of
price stability and output stabilization.

Ghimire (2006) examined that monetary policy is one of the most important policies to
manage aggregate demand. Like other policies, the primary objectives of monetary policy
to attain the macroeconomics goal or objectives such as stability, economic growth. The
main objectives of the study of monetary policy is one of the most important policies to
manage aggregate demand and achieve macroeconomics goals such as stability, growth,
full employment by analyzing the article we found the challenges and prospects of
monetary policy in Nepal, such as inflation, exchange rate, financial sector development.

Pandit (2010) analyzed that the monetary policy framework in Nepal should be more
forward-looking and flexible, taking into account the macro-financial linkages and
external shocks. The main objective from the article is to propose policy
recommendations for enhancing the monetary policy framework and improving the
macro-financial in Nepal. . The study obtained data from DOI sources and by analyzing
the article we found that it aims to obtain insight on how financial sector development
and globalization have impacted the effectiveness of monetary policy. The study
concluded the impact of global financial crisis on economy and financial sector, and
transmission channels of monetary policy.

Khatiwada (2012) investigates about the world economics have been adopting varieties
of monetary policy framework amid continuing debate on choosing the right one amongst

6
varied monetary policy frameworks. The main objectives of the study of monetary policy
for economic growth is to maintain price stability while keeping in mind the objective of
growth as price stability is a necessary precondition for sustainable economic growth.
The study obtained data from IMF world economic outlook 2011 and by analyzing the
article it is based on the assumptions that monetary policy can influence the level and
composition of aggregate demand by the manipulation of interest rates and the
availability of credit. The study concluded that monetary policy in emerging market
economics faces complex challenges due to globalization, financial instability and
requires a flexible and coordinated approach with other policies.

Budha (2015) examined that the central banking in Nepal began with the establishment of
NRB in 1956, and the monetary policy was exercised through the use of policy
instruments only in mid-1960s. The main objective from the article is to analyze the
issues of inflation convergence and monetary independency in the context of the existing
exchange rate peg and the capital flow policy of Nepal. The study obtained data from the
sources of inflation convergence test, monetary independence test, event analysis and
SVAR approach and from the article we found the evidence of inflation convergence,
monetary independence, and monetary transmission channels in Nepal, and also discusses
the issues of monetary policy implementation and money market development. The study
concluded that the paper examines the monetary policy transmission in Nepal using
narrative and SVAR approaches, and find evidence of bank and assets price channels.

Karki et al. (2020) investigated that the economic growth has always been a substantial
part of discussion in context of developing economics like Nepal. The main objective
from the article is to provide monetary policy implications and recommendations for
maintaining price stability and achieving sustainable economic growth. The study
obtained data from the sources of economic survey reports, world bank database and by
analyzing the article we found that, there is a negative and significant relationship
between inflation and economic growth in Nepal, which is consistent with most of the
previous studies. The study concluded the relationship between inflation and economic
growth in Nepal is inconclusive.

7
Mahara (2021) analyzed the relationship between money supply, inflation growth, and
public expenditure in the case of Nepal. Almost all the studies showed a positive effect of
money supply on long- run economic growth, both positive as well as a negative effect of
inflation on economic growth and capital expenditure on economic growth. The main
objective of this study was for the economic growth which means supporting the
expansion of output, income, and employment in the economy, which improves the living
standards of the people. The study obtained the sources from bound test, vector error
correction model. By analyzing the article it can be found that change in money supply
and capital expenditure can affect economic growth, but not vice versa. This indicated
that monetary policies can be used as effective tools to stimulate the economy. The study
concluded that money supply, capital expenditure, and inflation are key determinants of
economic growth.

Bhatta, (2022) examined a doctoral thesis on the interactions between monetary policy
and exchange rate in Nepal, a small open economy that has a fixed exchange rate with
india. The main objective of the study is to test the validity of the uncovered interest rate
parity condition between Nepalese rupees and Indian rupees using a new-Keynesian
model and a state space model with a Kalman filter approach. By analyzing from the
article we found that the real effective exchange rate and inflation expectations are the
main factors influencing the interest rate. The study concluded the interactions between
monetary policy and exchange rate in Nepal.

Joshi (2022) examined that there is a long-run relationship between monetary policy and
GDP growth, and that monetary policy can reduce unemployment, promote investment,
and stabilize the economy it also provides implications and recommendations for
Nepalese government and central bank to enhance the effectiveness economic growth and
stability. The main objective of this study is was to analyze the impact of monetary policy
variables such as money supply, interest rate, exchange rate, and inflation on real GDP
growth in Nepal using multiple regression analysis. The study obtained the sources from
the vector error correction model and by analyzing the article it can be found that the
central bank sets a specific inflation target and adjusts its monetary policy instruments to
achieve it. The authors argue that inflation targeting can enhance that credibility,

8
transparency, and accountability of monetary policy in Nepal. The study concluded that
the monetary policy has a significant impact on economic growth of Nepal and suggest
that policy makers should focus on healthy monetary policy for the country's
development.

Mehar (2023) analyzed that the monetary policy is the way that a central bank or a
government influences the economy by controlling the supply and cost of money and
credit. The main objective of the study was to discuss the role of monetary policy in
economic growth and development, and how different countries and regions use various
tools and strategies to achieve their monetary policy objective. The study obtained
sources from the panel least square technique, broad money and credit to private sector
and the study found that, the article states that the usual goals of monetary policy are to
achieve or maintain full employment, high economic growth, and stable prices and
wages. These goals may vary depending on the country and the situation, but they
generally aim to foster economic welfare and stability. The study concluded that credit to
private sector and external debt are significant determinants of economic growth and
development through their impact on investment in infrastructure.

Table 1: Summary table of Literature review

Empirical Review
S.N Author & Objectives Findings
Year
1 Rasche, To address evolving views on the role To assesses practical
R.H., and and effectiveness of monetary policy, challenges central
Williams, highlighting challenges and issues in its banks encounter in
M. (2005) implementation and evaluation. monetary policy,
covering issues like
policy instruments,
transmission
mechanisms, inflation
and communication of

9
 policy goals and
actions.

2  To,
Ghimire, R. provide the highlights that It analyze challenges
(2006) monetary policy is crucial for managing and prospect of
aggregate demand and achieving monetary policy in
macroeconomics goals, including Nepal, including issues
stability, growth, and full employment. like inflation, exchange
rates, and financial
sector development
3 Pandit, R. To, propose policy recommendations It gains insights into
(2010). for enhancing the monetary policy how financial sector
framework and improving macro- development and
financial stability in Nepal. globalization have
influenced the
effectiveness of
monetary policy.
4
Khatiwada, To, achieve economic growth by It assume that monetary
Y. R. prioritizing price stability recognizing it policy, through interest
(2012). as a vital prerequisite for sustainable rate manipulation and
growth. credit availability , can
impact both the level
and composition of
aggregate demand
5 Budha, B. To, analyze inflation convergence and It uncovers evidence of
B. (2015) monetary independency issues within inflation convergence,
Nepal’s exchange rate peg and capital monetary
flow policy. independence, and
transmission channels
in Nepal, addressing
and money market

10
 development issues.
6 

Karki,  To,
S., offer monetary policy It reveals a consistent
Banjara, S., recommendations for price stability and negative relationship
and sustainable economic growth. between inflation and
Dumre, A. economic growth in
(2020) Nepal, aligning with
prior research findings.
7 Mahara, T. To, foster economics growth by It reveals the altering
S. (2021) promoting increased output, income, money supply and
and employment, thereby enhancing capital expenditure
overall living standards. influences economic
growth, highlighting the
effectiveness of using
monetary policies.
8 Bhatta, G. To test the uncovered interest rate It reveals that the real
R. (2022). parity condition between Nepalese and effective exchange rate
indian rupees using a new- Keynesian and inflation
model and a state space model with a expectations are the
kalman filter approach. primary factors
influencing interest
rates.
9  To, assess the influence of monetary It
Joshi, U. L. explores inflation
(2022) policy variables on real GDP growth in targeting in Nepal
Nepal through multiple regression enhances monetary
analysis policy credibility,
transparency.
10
Mehar, To, explore how monetary policy It asserts that monetary
M.A.(2023) contributes to economic growth and policy aims for full
development, examining diverse tools employment, economic

11
 and strategies employed by countries growth, and stable
and regions to achieve their monetary prices, with variations
objectives. based on country and
situation for overall
economic welfare and
stability.

2.2 Data Presentation and Analysis

In Nepal, managing money supply and inflation is crucial for economic growth.
Controlled by the NRB, a well- managed money supply promotes stable borrowing costs,
encouraging investment. Effective inflation control ensures price stability, fostering
confidence among consumers and businesses. Stable inflation rates contribute to a
favorable real interest rate, supporting sustainable economic growth. In summary
strategic regulation of money supply and inflation plays a pivotal role in fostering
sustained economic growth in Nepal.

Table 2 : Change in inflation rate and money supply growth

Year Inflation Rate (Annual%) Money Supply GDP Growth

Growth Rate (%)

(Annual %)

2012 8.1 16.9 4.67

2013 9.8 16.6 3.53

2014 7.7 17.1 6.01

12
2015 6.0 16.6 3.98

2016 4.5 15.9 0.43

2017 4.5 16.4 8.98

2018 4.4 16.5 7.62

2019 6.9 16.9 6.66

2020 4.2 15.6 -2.37

5.3 16.0 4.84

2021

Source : World Bank.

This table shows the Inflation Rate, Money supply growth, and GDP growth rate of
Nepal from 2012 to 2021. The Inflation rate is a measure of the rate at which the general
level of prices for goods and services is rising, and the Money Supply Growth is the rate
at which the total amount of money in circulation is increasing. The GDP Growth Rate is
a measure of the increase in the country’s economic output over a period of time.

The data shows that Nepal’s Inflation Rate has been volatile over the years, with a high
of 9.8% in 2013 and a low of 4.2% in 2020. The Money Supply Growth has also
been volatile, with a high of 17.1% in 2014 and a low of 15.6% in 2020. The GDP
Growth Rate has also been volatile, with a high of 8.98% in 2017 and a low of -2.37% in
2020.

Overall, the data suggests that Nepal’s economy has been volatile over the years, with
fluctuations in the Inflation Rate, Money Supply Growth, and GDP Growth Rate.

13
2.3 Findings

After analyzing the data we found that the Inflation Rate, Money Supply Growth, and
GDP Growth Rate from 2012 to 2021. Notably, the Inflation Rate exhibits significant
volatility, ranging from a peak of 9.8% in 2013 to a trough of 4.2% in 2020. Similarly,
the Money Supply Growth and GDP Growth Rate also display fluctuations, with highs
and lows over the mentioned period. For instance, Money Supply Growth experienced a
peak of 17.1% in 2014 and a low of 15.6% in 2020, while the GDP Growth Rate reached
a high of 8.98% in 2017 and a low of -2.37% in 2020. These findings collectively
indicate a degree of economic instability in Nepal, with notable variations in key
indicators.

In summary, the overall trend observed in the data underscores the volatility of Nepal's
economy. The country has witnessed fluctuations in the Inflation Rate, Money Supply
Growth, and GDP Growth Rate over the examined years. These variations may pose
challenges for economic planning and policy formulation, requiring a closer examination
of the underlying factors contributing to the observed economic instability in Nepal.

14
 CHAPTER III
CONCLUSION

3.1 Conclusion
In conclusion, analysis of data spanning from 2012 to 2021, we focused on three crucial
indicators: Inflation Rate, Money Supply Growth, and GDP Growth Rate. . Notably, the
Inflation Rate showed significant ups and downs, hitting its peak at 9.8% in 2013 and
reaching a low of 4.2% in 2020. Similarly, Money Supply Growth and GDP Growth Rate
experienced fluctuations, with peaks and troughs during this timeframe. For example,
Money Supply Growth reached its highest point at 17.1% in 2014 and its lowest at 15.6%
in 2020. The GDP Growth Rate also had its highs and lows, hitting 8.98% in 2017
dropping to -2.37% in 2020.
In summary, the collective findings paint a picture of economic instability in Nepal. The
Inflation Rate, Money Supply Growth, and GDP Growth Rate all demonstrate varying
patterns, indicating the challenges of maintaining a stable economic environment. This
information highlights the need for a closer examination of the factors contributing to
these fluctuations, as it poses potential challenges for economic planning and policy
formulation in the country.
To conclude, the overall trend observed in the data underscores the volatility in Nepal's
economy over the examined years. The country's economic indicators have shown
notable variations, signaling the necessity for a thorough understanding of the underlying
factors influencing the observed economic instability.

15
 REFERENCES

Bhatta G.R (2022). Uncovered interest rate parity and monetary policy rule in a small
open economy : The case of Nepal.

Budha, B. B. (2015). Monetary policy transmission in Nepal. Journal of Economic

Literature, 29, E420.

Dutkowsky, D. H., Cynamon, B. Z., & Jones, B. E. (2006). US narrow money for the
twenty‐first century. Economic Inquiry, 44(1), 142-152.

Ghimire, R. (2006). Overview of Monetary Policy in the Nepalese Context. Economic

Journal of Nepal, 29(1), 54–60.

Gnawali, L. (2019). Money supply and economic growth of Nepal. International

Journal of Business and Management Research, 3(9), 133-149.

Hoggarth, G. (1996). Introduction to monetary policy. Bank of England

Joshi, U. L. (2022). The Impact of Monetary Policy on Economic Growth in Nepal: An

Empirical Analysis. International Research Journal of MMC (IRJMMC), 3(3),
54–65.

karki, S., Banjara, S., and amp; Dumre, A. (2020). A review on impact of inflation on
economic.

Khatiwada, Y. R. (2012). Current and future challenges to monetary policy in Emerging

market economies. Governor, Nepal Rastra Bank, Nepal.

Mahara, T. S. (2021). An Empirical Investigation Between Money Supply, Inflation,

Capital Expenditure and Economic Growth in Nepal. Quest Journal of
Management and Social Sciences, 3(1), 23-39.

McPhail, K. (2000). Broad Money: A Guide for Monetary Policy. Bank of Canada
(2000), 51-102.

Mehar, M.A (2023), "Role of monetary policy in economic growth and development: from
theory to empirical evidence", Asian Journal of Economics and Banking, Vol. 7
No. 1, pp. 99-120.

Pandit, R. (2010). Macro-financial links and monetary policy management in

Nepal. Macro-financial Links and Monetary Policy Management, 149.
16
Rasche, R.H., & Williams, M. (2005). The Effectiveness of Monetary Policy. Monetary
Economics.

Tiwari, B. K., & Devaraj, M. (2019). Effectiveness Of Monetary Policy For The
Sustainable Development Of Nepal’s Economy. Think India Journal, 22(14),
11434-11452.

THE KATHMAND POST (AchyutWagle):

https://kathmandupost.com/columns/2022/07/04/challenges-to-the-new-monetary-
policy

Nepal Rastra Bank (NRB). (2022) Monetary Policy for FY 2022/23

Monetary-policy-in-English-2022_23-Full-text.pdf (nrb.org.np)

World bank (2023) inflation and money supply : overview A Global Database of
Inflation (worldbank.org)

17
18
19