Monetary policy and global uncertainty in a small open economy: an ARDL evidence with structural breaks in Nepal

Abstract

This paper investigates how Nepal’s monetary policy reacts to growing global uncertainty and major structural changes, highlighting the challenges of a small open economy. Annual data from 1977 to 2024 were measured using the Autoregressive Distributed Lag (ARDL) framework which include structural break dummies for the 2015 earthquake and economic blockade, and 2020 COVID-19 pandemic. Unit root and cointegration tests were used; error correction form of ARDL model captures the log-run relationship and speed of adjustment, and Granger causality is applied to measure short-run predictive links between the variables. The Findings highlights that global uncertainty weakens the impact of monetary policy on growth, through foreign-exchange reserves and inflation maintain a positive long-run influence. Structural breaks alter the speed and direction of policy transmission, with rapid but uneven adjustments to equilibrium. Nepal’s monetary system remains highly exposed to external shocks, demanding flexible, credible, and well-coordinated policy actions.