This study aims to identify the trade (export, import and trade balance) determinants of Nepal using extended gravity model and recommend specific trade policy to promote foreign trade. The gravity model of international trade takes notion from Newtonian physical science that the gravitational force between any two objects is proportional to the product of their masses and inversely proportional to distance; similarly, the trade between any two countries is proportional to the product of their GDPs and inversely proportional to distance. Empirical results based on panel data set containing 21 major trade partner countries for 6 years found that export and import of Nepal is explained by real GDP of trade partner countries. Increase in real GDP of trade partner countries increases both export and import; however, export increases at higher rate than import. The trade deficit of Nepal increases if real GDP of trade partner country increases, even though export is increasing at higher rate than import. This is because Nepal is importing more than exporting to those countries in absolute terms. Nepal exports more to SAFTA countries than non-SAFTA and imports less from the OECD countries than non-OECD. As per basic idea of gravity model, distance to trade partner countries is highly significant implying higher the distance, lower the trade. The country specific fixed effect analysis shows that time invariant factors are also significant to determine the trade balance of Nepal.

This paper investigates the demand for money in Nepal using the Autoregressive Distributed Lag (ARDL) approach for the period of 1975-2011.The results based on the bounds testing procedure reveal that there exist the cointegration among the real money aggregates (and), real income, inflation and interest rate. The real income elasticity coefficient is found to be positive and the inflation coefficient is negative. The interest rate coefficient is negative for both of the real monetary aggregates supporting the theoretical explanation. In addition, the error correction models suggest that the deviations from the long-run equilibrium are short-lived in than . Finally, the CUSUM and CUSUMSQ tests reveal that the money demand function is stable, but money demand function is not stable implying that the monetary policy should pay more attention to than .

Once Nepal eased the access to the international labor market, there is an increasing trend of Nepalese working abroad, where annually thousands of young people migrate from the country. Consequently, there has been a sharp increment of remittance inflow in the recent years. Since remittance helps people improve the living standards, it has been observed as a good contributor for the poverty reduction in Nepal. Nevertheless, it might further deteriorate the trade balance, causing higher demand for consumable goods, most of which are imported in Nepal. Using cointegration techniques and a Vector Error Correction Model (VECM) based on the monthly data of merchandise import, worker’s remittance and trade deficit for ten years period, this paper studies whether remittance causes the merchandise import and trade deficit to raise in the long run. The cointegration equation show that there is a long-run positive unidirectional causality from remittance to import as well as remittance to trade deficit implying that remittance causes merchandise import and deteriorates trade balance.

This paper examines short term and long term relationship between nominal interest rates and budget deficits for Nepal using the data for 1988 to 2011. Engle and Granger Error Correction Mechanism (ECM) is applied for the analysis. The regression results show that budget deficits and budget deficits- GDP ratio do not have significant effects on nominal interest rates in Nepal. So, budget deficits in Nepal are interest rates neutral. We come to the conclusion that budget deficits are not crowding out the private investment in this country. However, the deficits have been increasing the burden of loans financing current consumption at the expense of the future consumption, which will have serious implications on the growth of economy.