Invited ArticleImpact of monetary policy on exchange market pressure: The case of Nepal

- Nepal's exchange rate faces pressure because of weak fundamentals and rising remittances.
- Using EMP model, we find evidence that monetary policy can ease such pressure.
- For estimation, a new technique, impulse indicator saturation, is used.
- The new technique along with general-to-specific modeling helped to attain an empirically robust model.

This paper uses a monetary model of exchange market pressure to examine the impact of monetary policy on the Nepalese exchange rate. Using a recently developed estimation technique, impulse indicator saturation, along with general-to-specific modeling, we find that a contractionary monetary policy results in easing of pressure on the exchange rate. The robustness of the results is confirmed using misspecification tests.