Impact of Foreign Exchange Reserve on Economic Growth in Nepal

Abstract

This study primarily focuses on the analysis of the contributions of foreign exchange reserve to the economic growth of Nepal by using time series data obtained from the year 1975 to 2018 A.D. In order to assess a relationship between these variables, statistical procedure of unit root test, cointegration and Vector Error Correction Model (VECM) are applied. In addition to the t-statistics, Wald-test for joint significance of coefficients is applied and VECM is performed for testing the impact of the past values of foreign exchange on dependent variables which show the nation’s economic growth. Based on the statistical outcome; Johansen cointegration test indicates the existence of the long-run relationship among variables. The Vector Error Correction outcome and Wald statistics confirm that the past values of foreign exchange have a positive contribution to the economic growth; and foreign exchange reserve has contributed to the economic growth of Nepal.