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Abstract:
This study aims to investigate the effects of money supply on economic growth of Nepal over the period 1975 to 2016,using co-integration, Vector Error Correction Model (VECM) and Causality test to make a conclusion. Augmented Dickey-Fuller (ADF) unit root test is used to measure the stationarity of variables. The model is specified with four macro variables, namely, Gross domestic Product (GDP), Narrow Money (M1), Broad Money (M2) and foreign assistant (FA). The study showed that money supply is positively significant to economic growth and foreign assistant is negatively significant to economic growth of Nepal at 1 percent level of significance. Co-integration test disports the long run association among the variables. The result reveals that, there exist unidirectional causal relationships from LM1 to LGDP, LFA to LGDP and LM2 to LM1at 5%, whereas there exists bidirectional causal relationship between LM2 and LGDP. The study suggests that to increase money supply to achieve higher and rapid economic growth of Nepal.
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