Does Remittance in Nepal Cause Gross Domestic Product? An Empirical Evidence Using Vector Error Correction Model

Abstract

This study aims to investigate short and long run causality between the variable gross domestic product and remittance. The study is based on the estimation of vector error correction model. Testing the unit root and the co-integration is the basic requirement for the estimation of vector error correction model. Further, it also has estimated remittance elasticity using ordinary least square method. The finding reveals that the contribution of remittance in gross domestic product is only 0.07%. It means a 1% change in remittance will change the gross domestic product by only 0.07%. It indicates that the remittance what Nepal received from its migrants is being consumed, not saved and invested in the productive sector that can create gainful employment to the generation to come. Evidence has not support the hypothesis of remittance causes gross domestic product in the long run but there is strong evidence about the short run causality running from remittance to gross domestic product. But opposite is true in reverse order. Gross domestic product causes remittance in both short and long run.