Nexus Between Political Stability and Economic Growth: An Empirical Study From Nepal

Abstract

Abstract This study examines the impact of the political stability index, including inflation rate and gross capital formation growth, on Nepal’s economic growth. This study uses secondary data from the World Bank, covering 27 annual data points from 1996 to 2022. Descriptive and exploratory research designs are used. Some statistical and essential econometric tools like graphs, descriptive statistics, correlation analysis, Johnsen co-integration test, vector error correction model, and Wald test are used in the study. The independent and dependent variables exhibit long-term cointegration. The preceding year’s political stability has a favorable influence on current economic expansion. One percent improvement in the previous year’s political stability index led to a 0.1896 percent increase in economic growth. One percent increase in inflation results in a 0.1884 percent decrease in economic growth in Nepal. Similarly, 84.96 percent of the variation in economic growth is influenced by factors such as past economic growth, political stability, inflation, and the expansion rate in gross capital accumulation over an extended period. The short-term economic growth of Nepal is influenced by factors such as the previous year’s economic growth, political stability index, and growth in gross capital formation. Nevertheless, the inflation rate does not statistically explain short-term economic progress. To develop sustainable economic growth in Nepal, it is crucial to undertake critical policy initiatives such as enhancing the political stability index, encouraging capital formation, and efficiently managing inflation.