Stability and Robustness of Inflation Model of Nepal: An Econometric Analysis

This paper investigates the robustness and stability of inflation model of Nepal. Unit root test is applied to confirm the validity of random walk of major macro variables relating to inflation and its determinants. A test of cointegration between inflation and its explanatory variables based on residual is applied to examine the long-run relationship. Information obtained from cointegrating equation, an Error Correction Model (ECM) is developed which shows both long-run and short-run relationship. It is found that ECM of inflation of Nepal is stable and robust on the ground of various econometric tests. © 2006, The Indian Econometric Society.