International Journal of Academic Research ISSN: 2348-7666; Vol.4, Issue-1(8), January, 2017 Impact Factor: 4.535; Email:
[email protected] Relationship among GDP, Gross Capital Formation (GCF) and Foreign Aid in Nepal Arjun Kumar Baral Associate Professor of Economics, Tribhuvan University, Nepal Abstract The present paper aims at examining the long run relationship among the macroeconomic variables GDP, GCF and Foreign Aid in Nepalese economy. Nepal has been receiving foreign aid from both bilateral and multilateral sources since last few decades. India has been participating actively in Nepal’s overall economic development including the development of physical and social infrastructure since 1951. The paper focuses on both descriptive and time series econometric analysis for the period 1975- 2014. The econometric method includes testing for stationarity (unit root test), Johansen’s cointegration test, FMOLS and residual diagnostic test for FMOLS. Though foreign aid is playing a vital role for overall economic development of Nepal, the relationship between foreign aid and GDP could not be established due to stationarity problem. The Johansen’s Cointegration test implies that there exists a long run equilibrium relationship between GDP and GCF. Finally, the FMOLS implies that a ten percent increase in GCF causes Nepalese GDP to increase by 6.3 percent where foreign aid is taken as an additional deterministic regressor. Keywords: Foreign Aid, GDP, GCF, FMOLS, Cointegration, Nepal 1. Introduction: econometric analysis for concerned variables. Finally, section 6 concludes the Nepal, a least developed country in overall findings of the present work. south Asia, has been receiving foreign aid 2.