Estimation of Import Demand Function Using ARDL Method: Evidence from Nepal

Abstract

Nepal’s dependence on remittance has been increasing over the years. This has the direct positive impact on overall consumption and in turn indirect positive impact on import. This paper aims to estimate the import demand function during the period 1990-2017 with the help of autoregressive distributed lag (ARDL) model. Bound testing conforms the existence of cointegration among the variables (import, remittance, gross domestic product, and consumer price index). The elasticity coefficient of import with respect to remittance is found 1.37 and 0.97 in the short and long run respectively. It implies that a 1% increase in remittance leads to increase the import by 1.37% in the short run and 0.97% in the long run respectively. Similarly, the elasticity coefficient of import with respect to GDP is found 0.24 and 0.14 in the short and long run respectively. It implies that a 1% increase in GDP leads to increase the import by 0.24% in the short run and 0.14% in the long run respectively. The elasticity coefficient of import with respect to CPI is found insignificant. These findings proved that the remittance is the key factor to increase the import in Nepal.