Remittances and Economic Output in Nepal: A Short-Run Analysis

Abstract

Remittance inflows have become a critical driver of macroeconomic stability and short-term economic output for Nepal, one of the largest remittance-receiving economies. This study examines the impact of inbound remittances on the Nepalese economy using annual data from 2000 to 2023. We estimate a first-di!erence regression model of short-run changes in Gross Domestic Product (GDP) as a function of changes in remittance inflows, controlling for gross capital formation, trade openness, and foreign assistance. This approach is motivated by the notion that remittance-driven growth is a short-run phenomenon. The empirical results indicate a statistically significant and economically substantial short-run e!ect: a one-dollar increase in remittance inflows is associated with approximately a two-dollar increase in GDP. While gross capital formation and trade openness have positive e!ects on GDP, the impact of foreign assistance is not statistically significant. The findings underscore Nepal’s structural reliance on remittances for short-term support and imply that policymakers should channel remittance contributions into productive investments to foster sustainable growth and reduce long-run dependence on foreign labour migration.