AN ECONOMETRIC ANALYSIS OF DETERMINANTS OF EXCHANGE RATE IN NEPAL.

Exchange rate is an important macroeconomic variable which influence internal and external balance and indicates external competitiveness of an economy. It plays a role of catalyst for macroeconomic stability. The main objective of this research is to investigate the relationship of exchange rate with different macroeconomic variables such as GDP, inflation, interest rate, broad money supply, and trade openness in order to reveal significant determinants of exchange rate of Nepal. The research uses secondary annual average data obtained from NRB, WB, and IMF from time period of 1993 to 2022 AD. The study uses ADF test to test the stationarity of variables. ARDL approach to co-integration is used for estimation of long run relationship and ECM is applied for estimating short run relationship between dependent and independent variables. The study also uses CUSUM and CUSUM of square test to validate stability of coefficient of long run model. Results from ARDL bound co-integration test shows evidence of long run co-integration between dependent variable and regressors as calculated F-statistics (3.989) is greater than critical value for upper bound I(1). The results of estimated long run coefficients using ARDL approach shows that inflation and money supply have negative long run relation with exchange rate whereas GDP, interest rate and trade openness have a positive long run relation with exchange rate. The coefficient of the error term is found to be --0.33 using ECM. Results from ECM indicate positive and significant effect of interest rate on exchange rate in short run, while the effects of GDP, inflation, money supply, and trade openness are found insignificant in short runs. The findings of this study may aid policy makers of Nepal to formulate such monetary and fiscal policies that makes exchange rate less volatile and more productive for sustainable economic growth of the nation. [ABSTRACT FROM AUTHOR]