Capital Market Linkage to Economic Growth in Nepal

Abstract

This article examines the causal relationship between capital market development and economic growth in Nepal using annual time series data from 1994-2019. Total market capitalization is used as a proxy of secondary market development and the total public issue of securities in a particular year is taken as an indicator of primary market development. Using the Johansen cointegration test and vector error correction method (VECM) in regression analysis, the study reveals that capital markets in Nepal are supporting economic growth through efficient fundraising, efficient allocation of resources, fair price determination and liquidity. The findings from this study conclude that there is a unidirectional causality running from capital market development to economic growth in both the long-run and short-run. However, this study found no support for causality running from economic growth to the capital market. Therefore, the findings from this study recommend policies that increase the reach of the capital market to small and medium enterprises (SMEs) and individual investors. Keywords: capital market, market capitalization, primary market, economic growth, Nepal