Optimal Rate of Inflation in Nepal : An Empirical Investigation

This paper attempts to empirically examine the optimal rate of inflation for Nepalese Economy on the basis of annual data over the period 1975 to 2014. It employs the non-linear specification by Sarel (1996) and Conditional Least Squares Specification by Khan and Senhadji (2001) to estimate the optimal rate of inflation. The results from the study suggest that the threshold rate of inflation is 6 percent for the Nepalese case. When inflation is below this threshold, it does not have any significant effect on growth or it may have a slightly positive effect, whereas inflation has significant retarding effects on growth beyond the threshold. It is, thus, desirable to contain inflation to less than 6 percent to ensure that economic growth is unharmed by the pernicious effects of high inflation.