Whether Inflation Hampers Economic Growth in Nepal

Present paper seeks to examine whether inflation hampers economic growth in Nepal or not with the help of Distributed Lag Models using the annual data of GDP and Consumer Price Index (CPI). The nominal GDP is converted into real terms and transformed into logarithmic form and the first difference of the real GDP in logarithmic form is taken as the proxy for economic growth. The CPI data is converted into logarithmic form and its first difference is taken as the proxy for inflation. While using the distributed lag models, the economic growth of Nepal at current time is adversely affected by inflation of the same time, whereas the current economic growth is favorably affected by the inflation of preceding time. The estimated regression of economic growth on inflation up to lag one is found to be robust and stable as indicated by residuals diagnostic test ( serial correlation, heteroscedasticity and normality tests) and Ramsey's RESET test. The findings of the study throw light in policy point of view. The present study suggests that the rate of inflation would automatically be adjusted with increasing output if rate of investment in increased.