Applicability of Taylor's Rule in Nepalese Monetary Policy

The present paper aims to examine the applicability of Taylor's Rule in Nepalese context employing the annual data series of interest rate, inflation rate and output gap from the period 1975–2011 by using the methodology of Tayl0or's rule and Taylor type rule. The empirical findings reveal that Nepalese monetary policy does not correspond to the Taylor's rule. The policy rate of Nepal is not reacted to output gap, where as it is reacted to inflation rate. The coefficient of inflation gap is found to be positive and significant, which throws light in policy perspective. Nepalese policy rate needs to be increased to cope with the inflationary pressure of Nepalese economy.