CAUSAL RELATIONSHIP BETWEEN REMITTANCE AND ECONOMIC GROWTH IN NEPAL: AN ECONOMETRIC APPROACH

This study attempts to investigate the casual relationship between gross domestic product and remittance. Using the data (1974-2013), Unit root, co-integration and Granger causality tests are being conducted. Both series contain unit root at their level meaning that they are non-stationary but have become stationary after first difference. Johansen co-integration test conformed that there is one co-integrating equation implying the long run relationship between these variables. Similarly, from the Granger causality test, it is found that remittance causes gross domestic product. Ordinary least square produced insignificant remittance income elasticity coefficient a mere 0.02. It reveals that a 1% change in remittance will change the gross domestic product by 0.02%. The implication is that the government should adopt a policy to use remittance in those sectors that can help to achieve high economic growth. From this study it is seen that remittance has affected growth at least in the short run but it cannot be considered as a permanent component that will have long run implications on growth. However, in Nepal remittance plays a significant role, which covers more than 25% of gross domestic product.