Does Remittance Inflow Granger-Cause Consumption in Nepal? A Time Series Analysis

Abstract

This paper examines whether remittance inflows Granger-cause household consumption in Nepal using annual time-series data from 1993 to 2023. The analysis is conducted within a multivariate framework that includes real GDP, the consumer price index and broad money as a share of GDP as control variables, alongside remittances and consumption. After all five series are confirmed to be integrated of order one, the Johansen cointegration test identifies one cointegrating vector. A vector error correction model is estimated, and Granger causality is tested within this framework. The long-run results show that remittances and GDP both raise household consumption, with elasticities of 0.31 and 0.58, respectively. Unidirectional Granger causality runs from remittances to consumption in both the short run and the long run. The error correction term in the consumption equation is negative and statistically significant, implying that about 36 percent of any deviation from long-run equilibrium is corrected within a year. The findings hold after income, prices and financial depth are controlled for, and indicate that remittances are a structural rather than a temporary driver of household spending in Nepal. The policy implications concern financial deepening, the channeling of remittances into productive investment, and the reduction of the exposure of households that depend heavily on income earned abroad.