This study examines the effects of commercial bank lending on economic growth in Nepal. The study has conducted correlation and regression analysis using panel data of twenty four commercial banks during the period of 1996 -2015. The empirical results show that bank lending has positive effects on the economic growth in Nepal. The study implies that the policy makers should focus their attention more on the development of formal sector financing, adequate development of modern banking sector, development of efficient financial market and infrastructures and establishment of interest sensitive investment environment to increase the bank lending which is instrumental to promote economic growth in Nepal.Journal of Advanced Academic Research Vol. 3, No.3, 2016, page:53-75

Commercial banks constitute a major chunk of total assets in the banking system in Nepal and extension of credit is one of the major functions of banking institutions. If banks are not efficient in their lending behavior, it may not contribute to economic growth. On the other hand, their inefficient and imprudent banking practices may lead to riskier financial instability. The main objective of the study is to test and confirm the effectiveness of the determinants of commercial bank lending behavior in Nepal by using time series Ordinary Least Square regression approach for empirical analysis. The model involves Nepalese commercial banks' private sector credit (pvct) as dependent variable and other variables such as their volume of deposits (dep), interest rate (Ir), stipulated cash reserve requirements ratio (crr), their liquidity ratio (lr), inflation (inf), exchange rate (exr), and gross domestic product (gdp) as independent variables for the period; 1975 – 2014. From the regression analysis, it was found that Gross Domestic Product and liquidity ratio of banks have the greatest impacts on their lending behavior. Granger Causality Test shows the evidence of unidirectional casual relationship from GDP to private sector credit. The study implies that GDP is the barometer of the economy and commercial banks should pay their attention to the overall macro economic situation of the country, factors affecting the GDP in general and their liquidity ratio in particular while taking lending decision.

This study examines the impact of commercial bank credit to the private sector on the economic growth in Nepal from supply side perspectives. The study has applied Johansen co-integration approach and Error Correction Model using the time series data for the period of 1975-2014. The empirical results show that bank credit to the private sector has positive effects on the economic growth in Nepal only in the long run. Nevertheless, in the short run, it has been observed a feedback effect from economic growth to private sector credit. More specifically, the growth in real private sector credit by 1 percentage point contributes to an increase in real gross domestic product by 0.40 percentage point in the long run. The empirical results imply that, policy makers should focus on long run policies to promote economic growth – development of modern banking sector, efficient financial market and infrastructure so as to increase the private sector credit which is instrumental to promote growth in the long run.

Tax elasticity and buoyancy estimates are the dynamic tools for measuring the tax performance. This study makes a revisit to the studies carried out earlier to measure tax elasticity and buoyancy in Nepal, in the context of the structural changes that have taken place in the tax system in recent years. The main objectives of the study are to measure the elasticity and buoyancy of tax and to ensure whether or not the tax system in Nepal is elastic. The study has applied time series regression approach for this empirical measurement. This study reveals that the tax system in Nepal is inelastic (less than unity) in the period 1975-2005 with a more than unitary buoyancy coefficients, thus reflecting that the bulk of revenue collection emanates from discretionary changes in the tax policy, rather than from automatic responses.

This paper estimates the optimal inflation rate in Nepal based on the data of the period 1978–2016. The novelty of the analysis is that it probes possible nonlinearity of the hypothesized impact of inflation on economic growth using alternative specifications. The results suggest that there exists a threshold effect of inflation. The Ordinary Least Squares method estimates the turning point of inflation to be 6.25 percent while that of the Hansen (2000) method shows the threshold level to be 6.40 percent. The maximum impact on growth associated with the turning point, and at the mean levels of other explanatory variables is quite high at 4.59 percent. The results suggest that Nepal should adopt an inflation target range around the computed optimal inflation rate to lower the inflation expectation and enhance economic growth.