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DOES NEPAL BORROW INFLATION FROM INDIA? AN EMPIRICAL STUDY
The analysis and discussions in the previous section confirms the existence of long run relationship between inflation in Nepal and trade deficit with India. The actual values of logCPI versus predicted logCPI as shown in figure 7, suggests the robustness of the employed Cointegration models. Additionally, the residuals of Cointegrating and VECM regressions are normally distributed as indicated by figures 3,4, and 6 show that the residuals are normally distributed adding the strength of the models used.