This paper is aimed at reviewing briefly the monetary system in Nepal and then performing empirical tests conducive to the settlement of the disputes on the direction of causality. Accordingly the author re-estimated the demand for money and re-examined the causal relationship between money income and prices in the case of Nepal. He uses annual time series for different monetary aggregates nominal and real income and prices covering the period 1963-1992.The data series were tested for their stationarity by using unit roots and cointegration techniques followed by optimum-lag-length test for causality based on Akaikes and Schwarzs information criteria. Based on the tests which he performed he finds unidirectional causality from narrow and reserve money to income and prices
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