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The Price Puzzle and Monetary Policy Transmission Mechanism in Pakistan: Structural Vector Autoregressive Approach

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  • Muhammad Javid

    (Pakistan Institute of Development Economics)

  • Kashif Munir

    (Pakistan Institute of Development Economics)

Abstract

This paper addresses the issue of monetary policy effectiveness, the price puzzle, and the positive response of prices to monetary tightening in Pakistan. The study examines the effects of the monetary policy shock on the price level and other macroeconomic variables such as output, exchange rate, and money supply within the structural VAR framework over the period 1992: M1 to 2010:M08. We find that a contractionary monetary policy shock has a positive effect on prices and the output increase over some horizon following the monetary tightening, but continuously falls after initial rise. The results also indicate that monetary contractions in Pakistan, over the period reviewed, are associated with the persistent depreciation of domestic currency value relative to the US dollar

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Bibliographic Info

Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 49 (2010)
Issue (Month): 4 ()
Pages: 449–460

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Handle: RePEc:pid:journl:v:49:y:2010:i:4:p:449-460

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Keywords: Monetary Policy; Price Puzzle; Structural VAR; Pakistan;

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References

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  1. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
  2. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
  3. Giordani, Paolo, 2004. "An alternative explanation of the price puzzle," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1271-1296, September.
  4. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1385-1413, October.
  5. Qayyum, Abdul, 2008. "Does Monetary Policy Play Effective Role in Controlling Inflation in Pakistan," MPRA Paper 13080, University Library of Munich, Germany.
  6. Saqib, Omar F & Omer, Muhamad, 2008. "Monetary Targeting in Pakistan: A Skeptical Note," MPRA Paper 14883, University Library of Munich, Germany.
  7. Sims, Christopher A. & Zha, Tao, 2006. "Does Monetary Policy Generate Recessions?," Macroeconomic Dynamics, Cambridge University Press, vol. 10(02), pages 231-272, April.
  8. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
  9. Efrem Castelnuovo & Paolo Surico, 2010. "Monetary Policy, Inflation Expectations and The Price Puzzle," Economic Journal, Royal Economic Society, vol. 120(549), pages 1262-1283, December.
  10. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  11. Krusec, Dejan, 2010. "The "price puzzle" in the monetary transmission VARs with long-run restrictions," Economics Letters, Elsevier, vol. 106(3), pages 147-150, March.
  12. Kim, Soyoung, 1999. "Do monetary policy shocks matter in the G-7 countries? Using common identifying assumptions about monetary policy across countries," Journal of International Economics, Elsevier, vol. 48(2), pages 387-412, August.
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Cited by:
  1. Munir, Kashif & Qayyum, Abdul, 2012. "Measuring the effects of monetary policy in Pakistan: A factor augmented vector autoregressive approach," MPRA Paper 35976, University Library of Munich, Germany.
  2. Sheikh Khurram Fazal & Muhammad Abdus Salam, 2013. "Interest Rate Pass-Through: Empirical Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(1), pages 39-62, Jan-June.

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