Financial Deepening and Economic Development in Nepal : A Forward Looking CGE Model with Financial Intermediation Dr. Keshab R Bhattarai University of Hull
Research Questions • Is it possible to construct a Multisectoral Forward Looking Dynamic General Equilibrium Model? • What are the efficiency and redistribution impacts of liberalisation of the financial sector in Nepal? • Do rural households gain more than urban households from liberalisation?
Main Characteristics of the Nepalese Economy • Low productivity, low income and widespread poverty • High population growth rate • High illiteracy and low level of human capital development • Low level of capital accumulation • Small open economy heavily influenced by a single neighbour in the South (prices, exchange rates, financial sector policies) • Land-locked and high cost economy • Under developed financial markets
Sources of Financial Sector Distortions Sector Specific distortions
Vicious Circle of poverty: Development Problem Low Saving LowInvestment Low Income Low Capital Stock Low Producitivity
Structure of the Model Consumers: Urban and Rural Households with infinite lives Utility each period Welfare over the period Government Tourists Intermediaries in only in Blackhole Model Producers: Investors: Capital and Investment goods Production Firms/Industry: Goods and Services (11 Sectors) Public Goods Tourism Traders: Exporters Nepal-India Market Third Countries Importers Nepal-India Market Third Countries
Calibration of the Model Financial Distortions in the Benchmark
Borrowing Lending Scenarios Blackhole Scenario
Base Year Parameters from Nepal SAM, 1991 Table 5.6 Source: Nepal SAM 1990/91, appendix 5.1
Capital Stock in Food-Crop Sector Under Different Model Assumptions
References • Aurbach Alan J. and L. J. Kotlikoff (1987), Dynamic Fiscal Policy. Cambridge • University Press. • Bhattarai Keshab R (1997) Financial Deepening and Economic Development in Nepal :A Forward Looking CGE Model with Financial Intermediation, Ph.D. dissertation Northeastern University, Boston, Massachussetts. • Buehrer Timothy S. and F. di Mauro (1993) “A Computable General Equilibrium Model of Nepal”, manuscript. • Go Delfin S. (1993) “External Shocks, Adjustment Policies and Investment in a Developing Economy: Illustrations from a forward-looking CGE model of the Philippines” , Journal of Development Economics 44 229-261 • Parente S.L.(1994) Technology Adoption, Learning-by-Doing, and Economic Growth, Journal of Economic Theory, 63, pp. 346-369. • Rutherford Thomas F. (1995) ,“Extension of GAMS for Complementary Problems Arising in applied Economic Analysis”, Journal of Economic Dynamics and Control, 19, 1299-1324. • Robinson Sherman (1991) “Macroeconomics, Financial Variables, and Computable • General Equilibrium Models”, World Development, vol. 19, no.11, pp.1509-1523, Pergamon Press plc. • Shoven John B. and J. Whalley (1984), “Applied General-Equilibrium Models of Taxation and International Trade: An Introduction and Survey”, Journal of Economic Literature, vol. XXII, Sept, pp.1007-1051.