Financial liberalization, weighted monetary aggregates and income in Nepal : an empirical investigation

This study attemps to investigate the role of monetary aggregates as intermediate indicators in Nepal using the Johansen cointegration approach. The major aim of this paper is to determine the long-run relationship between income and money on the basis of the financial liberalization era of 1981-94 in Nepal. In this study we introduced the Divisia montary aggregates as alternative to the traditional Simple-sum aggregates. Our results suggest that there is long-run relationships between these monetary aggregates and income in Nepal despite the changing financial environment during the period under study. Furthermore, the Divisia monetary aggregates can play an important role as intermediate indicators for monetary policy purposes in the Nepalese economy. (Sav Dev/DÜI)