Impact of Inflation on Economic Growth of Nepal

This study investigates the impact of inflation on economic growth of Nepal over the period 1974/75 to 2022/23. Employing annual time series data and using the Autoregressive Distributed Lag (ARDL) bounds testing approach, the research explores both the short-run and long-run effects of inflation on real GDP growth. In addition to inflation, other macroeconomic variables such as real exchange rate, real broad money supply to GDP ratio, and trade openness are incorporated into the model. The results reveal a nonlinear and statistically significant relationship between inflation and economic growth, with evidence of a threshold effect. Moderate inflation appears to support economic activity, while inflation above the estimated threshold adversely affects growth. The study confirms the presence of a long-run cointegrating relationship among the variables and identifies inflation as a key determinant of growth dynamics in Nepal. These findings highlight the importance of maintaining inflation within a stable range to promote sustainable economic performance. The study provides useful insights for policymakers in designing inflation-targeting frameworks and macroeconomic strategies aligned with growth objectives.