Asymmetric Impact of Diesel Price Shocks on Household Consumption in Nepal: Evidence from a Nonlinear Autoregressive Distributed Lag (NARDL) Model

Fuel pricing policy in Nepal, as in most oil-importing countries, is typically built on the assumption that diesel price increases and decreases affect household consumption in roughly mirror-image ways. This study tests that assumption directly. Because Nepal does not publish quarterly household consumption figures, official annual Household Final Consumption Expenditure (HFCE) benchmarks were first disaggregated into a quarterly series using the Chow-Lin (1971) generalized least squares method, with real quarterly GDP as the high-frequency indicator, and cross-validated against the Denton-Cholette (1971) modification. The resulting quarterly series, covering 2000Q1 to 2025Q4 (104 observations), was used to estimate a Nonlinear Autoregressive Distributed Lag (NARDL) model that decomposes the log diesel price into cumulative positive and negative partial sums, following Shin, Yu, and Greenwood-Nimmo (2014), while controlling for worker remittances, the nominal exchange rate, broad money supply, food inflation, and structural dummies for the 2015 Gorkha earthquake, the COVID-19 pandemic, and the Russia-Ukraine energy crisis.
The Pesaran, Shin, and Smith (2001) bounds test confirms a long-run cointegrating relationship among the variables, with an F-statistic of 5.84 against an upper bound critical value of 4.43 at the 1% significance level. The long-run Wald test rejects symmetry (p = 0.000): a positive diesel price shock carries a long-run elasticity of -0.185, significant at the 1% level, while a negative shock carries a considerably smaller and only marginally significant elasticity of 0.042. Nepali households, in other words, absorb the pain of a diesel price spike far more sharply than they enjoy the relief of a price drop. The short-run Wald test confirms the same pattern, and the model passes the full battery of diagnostic checks, including CUSUM and CUSUM of Squares tests for parameter stability across a 26-year sample marked by civil transition, a major earthquake, and a pandemic. Remittances and broad money supply are associated with higher consumption, while food inflation and exchange rate depreciation are associated with lower consumption, consistent with theoretical priors. These findings indicate that symmetric fuel-pricing frameworks systematically understate the protection households need during a price spike and overstate the relief that a price cut delivers. The study recommends that Nepal Oil Corporation's Fuel Price Stabilization Fund be deployed asymmetrically, weighted more heavily toward cushioning price increases than toward passing through price decreases, and offers a replicable methodological template for studying high-frequency household welfare in other data-scarce developing economies.

diesel price shocks; asymmetric price transmission; Nonlinear ARDL; household consumption; Nepal

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