India-Nepal Trade Dynamics and Exchange Rate Pass-through: Time-Varying Analysis of the Parameter
DOI:
https://doi.org/10.3126/irjmmc.v7i1.93038Keywords:
exchange rate pass-through, time-varying parameters, vector autoregression, Nepal, Nepal - India trade relations, monetary policy, inflation dynamicsAbstract
This paper analyses the exchange rate pass-through (ERPT) to consumer prices in Nepal by a Time-Varying Parameter Vector Autoregression (TVP-VAR) model. Adopting a quantitative research design, the study drew on monthly secondary data sourced from the Nepal Rastra Bank, the Central Bureau of Statistics of Nepal, and international databases, covering the period from January 2000 to October 2023. The data were analysed using Bayesian estimation through Markov Chain Monte Carlo (MCMC) simulation within the TVP-VAR framework with stochastic volatility. Since Nepal is a country with a fixed exchange rate pegged to the Indian Rupee and it has been integrated through trade at a huge rate with India, it is important to understand how the ERPT works in the monetary policy formulation. Three main findings in our empirical results include the first finding that when there is exchange rate depreciation, there are moderate consumer price increases, and the effect is realized in a period of twelve months. Second, there is a high time dispersion of ERPT, which reduces considerably during the initial stage after the monetary policy credibility improved with the establishment of a monetary policy structure and greater integration of the global value chain. Third, asymmetric shocks are strong with pass-through being much higher during depreciation than when there is appreciation, implying adhesive downward price changes. The research adds to the scanty empirical evidence on ERPT in landlocked developing economies and gives practical initiatives to the inflation-targeting regimen of Nepal Rastra Bank. The results highlight the need to have an effective monetary policy and to strengthen institutions to reduce the inflationary effects of external shocks.
Downloads
References
1. Adhikari, S. (2018). Impact of exchange rate on trade deficit and foreign exchange reserve in Nepal: An empirical analysis. Economic Review, 30, 36-50.
2. Beirne, J., Renzhi, N., & Panthi, P. (2024). Exchange rate pass-through in emerging Asia and exposure to external shocks. Economic Analysis and Policy, 81, 1608-1624. https://doi.org/10.1016/j.eap.2023.10.033
3. Ben Cheikh, N., Ben Zaied, Y., & Ben Ameur, H. (2023). Recent developments in exchange rate pass-through: What have we learned from uncertain times? Journal of International Money and Finance, 131, 102805. https://doi.org/10.1016/j.jimonfin.2023.102805
4. Burstein, A., & Gopinath, G. (2014). International prices and exchange rates. In G. Gopinath, E. Helpman, & K. Rogoff (Eds.), Handbook of International Economics (Vol. 4, pp. 391-451). Elsevier. https://doi.org/10.1016/B978-0-444-54314-1.00007-0
5. Bussière, M., Delle Chiaie, S., & Peltonen, T. A. (2013). Exchange rate pass-through in the global economy: The role of emerging market economies. IMF Economic Review, 62, 146-178. https://doi.org/10.1057/imfer.2014.5
6. Campa, J. M., & Goldberg, L. S. (2005). Exchange rate pass-through into import prices. Review of Economics and Statistics, 87(4), 679-690. https://doi.org/10.1162/003465305775098189
7. Carrière-Swallow, Y., Firat, M., Furceri, D., & Jiménez, D. (2023). State-dependent exchange rate pass-through. IMF Working Paper 2023/086. https://doi.org/10.5089/9798400240461.001
8. Choudhri, E. U., & Hakura, D. S. (2006). Exchange rate pass-through to domestic prices: Does the inflationary environment matter? Journal of International Money and Finance, 25(4), 614-639. https://doi.org/10.1016/j.jimonfin.2005.11.009
9. Delatte, A. L., & López-Villavicencio, A. (2012). Asymmetric exchange rate pass-through: Evidence from major countries. Journal of Macroeconomics, 34(3), 833-844. https://doi.org/10.1016/j.jmacro.2012.03.003
10. Dornbusch, R. (1987). Exchange rates and prices. American Economic Review, 77(1), 93-106.
11. Gopinath, G., Boz, E., Casas, C., Díez, F. J., Gourinchas, P. O., & Plagborg-Møller, M. (2020). Dominant currency paradigm. American Economic Review, 110(3), 677-719. https://doi.org/10.1257/aer.20171201
12. Ito, T., & Sato, K. (2008). Exchange rate changes and inflation in post-crisis Asian economies: Vector autoregression analysis of the exchange rate pass-through. Journal of Money, Credit and Banking, 40(7), 1407-1438. https://doi.org/10.1111/j.1538-4616.2008.00165.x
13. Jangam, B. P., Rath, B. N., & Akram, V. (2025). Reassessing the role of exchange rates in export dynamics: Evidence from a disaggregated industry-level analysis in the case of Nepal. Economic Modelling, 144, 106954. https://doi.org/10.1016/j.econmod.2025.106954
14. Krugman, P. (1987). Pricing to market when the exchange rate changes. In S. W. Arndt & J. D. Richardson (Eds.), Real-financial linkages among open economies (pp. 49-70). MIT Press.
15. Lama, A., Budha, B. B., Prabhesh, K. P., & Rana, S. (2025). Exchange rate pass-through in Nepal. Journal of Asian Economics, 97, 101749. https://doi.org/10.1016/j.asieco.2025.101749
16. López-Villavicencio, A., & Mignon, V. (2017). Exchange rate pass-through in emerging countries: Do the inflation environment, monetary policy regime and central bank behavior matter? Journal of International Money and Finance, 79, 20-38. https://doi.org/10.1016/j.jimonfin.2017.09.004
17. Mallick, S. K., & Marques, H. (2008). Pass-through of exchange rate and tariffs into import prices of India: Currency depreciation versus import liberalization. Review of International Economics, 16(4), 765-782. https://doi.org/10.1111/j.1467-9396.2008.00774.x
18. Nakajima, J. (2011). Time-varying parameter VAR model with stochastic volatility: An overview of methodology and empirical applications. IMES Discussion Paper Series 11-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
19. Nepal Rastra Bank. (2024). Quarterly Economic Bulletin. Research Department, Nepal Rastra Bank.
20. Paudel, R. C., & Burke, P. J. (2015). Exchange rate policy and export performance in a landlocked developing country: The case of Nepal. Journal of Asian Economics, 38, 55-63. https://doi.org/10.1016/j.asieco.2015.04.003
21. Primiceri, G. E. (2005). Time-varying structural vector autoregressions and monetary policy. Review of Economic Studies, 72(3), 821-852. https://doi.org/10.1111/j.1467-937X.2005.00353.x
22. Rodríguez, G., Castillo, P., Calero, R., Salcedo, R., & Arellano, M. A. (2024). Evolution of the exchange rate pass-through into prices in Peru: An empirical application using TVP-VAR-SV models. Journal of International Money and Finance, 142, 103023. https://doi.org/10.1016/j.jimonfin.2024.103023
23. Taylor, J. B. (2000). Low inflation, pass-through, and the pricing power of firms. European Economic Review, 44(7), 1389-1408. https://doi.org/10.1016/S0014-2921(00)00037-4
Downloads
Published
Issue
Section
License
Copyright (c) 2026 International Research Journal of MMC (IRJMMC)
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
