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Monetary Policy Channels of Pakistan and Their Impact on Real GDP and Inflation

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  • Karrar Hussain

Abstract

This paper is an attempt to estimate the relative impact of monetary policy on key economic variables i.e. output and inflation in Pakistan by covering the period from 1964-M1 to 2007-M12. For this purpose Vector Autoregression (VAR) approach is used, which is based on error correction model (ECM).We considered five pertinent channels through which monetary policy can affect economic activity of the country namely interest rate channel, exchange rate channel, government expenditure channel and credit channel. The objective of this paper is to identify the relative importance of each of these channels by employing Vector Autoregression (VAR) approach. We also generate Impulse Response Functions to confirm the response of a shock in a variable upon itself and other variables. Our study concludes that exchange rate is also a significant monetary policy instrument in Pakistan’s case for both controlling inflation and minimizing output variance in the economy.

Suggested Citation

  • Karrar Hussain, 2009. "Monetary Policy Channels of Pakistan and Their Impact on Real GDP and Inflation," CID Working Papers 41, Center for International Development at Harvard University.
    • Handle: RePEc:cid:wpfacu:41
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    References listed on IDEAS

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    3. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
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    5. Asif Idrees Agha & Noor Ahmed & Yasir Ali Mubarik & Hastam Shah, 2005. "Transmission Mechanism of Monetary Policy in Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 1, pages 1-23.
    6. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-439, May.
    7. David A. Bessler, 1984. "Relative Prices and Money: A Vector Autoregression on Brazilian Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 66(1), pages 25-30.
    8. Noor Ahmed & Hastam Shah & Asif Idrees Agha & Yasir Ali Mubarik, 2005. "Transmission Mechanism of Monetary Policy in Pakistan," SBP Working Paper Series 09, State Bank of Pakistan, Research Department.
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    Citations

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    Cited by:

    1. Jonghwa Kim, 2020. "Analysis for Growth Potential in Response to Changes in the Online Food Market," Sustainability, MDPI, vol. 12(11), pages 1-20, May.
    2. Naz, Farah & Mohsin, Asma & Zaman, Khalid, 2012. "Exchange rate pass-through in to inflation: New insights in to the cointegration relationship from Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2205-2221.
    3. Muhammad Zahid Naeem & Chan Bibi, 2019. "Macroeconomic Determinants of Economic Growth under the Perspective of Monetary Policy in Pakistan: An Empirical Analysis," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 8(3), pages 164-176, September.
    4. Kashif Munir & Abdul Qayyum, 2014. "Measuring the effects of monetary policy in Pakistan: a factor-augmented vector autoregressive approach," Empirical Economics, Springer, vol. 46(3), pages 843-864, May.
    5. Rozina Shaheen, 2020. "Credit market conditions and impact of monetary policy in a developing economy context," International Economics and Economic Policy, Springer, vol. 17(2), pages 409-425, May.
    6. Tayyaba Mukhtar & Muhammad Zeeshan Younas, 2019. "Monetary Policy Transmission Mechanism of Pakistan: Evidence from Bank Lending and Asset Price Channels," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 7(3), pages 121-139, September.
    7. Syed Ozair Ali, 2011. ": Power, Profits and Inflation: A Study of Inflation and Influence in Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 7, pages 11-41.
    8. Sumera Arshad & Amajd Ali, 2016. "Trade-off between Inflation, Interest and Unemployment Rate of Pakistan: Revisited," Bulletin of Business and Economics (BBE), Research Foundation for Humanity (RFH), vol. 5(4), pages 193-209, December.
    9. Munyanyi, Musharavati Ephraim, 2016. "The validity of bank lending channel in Zimbabwe," MPRA Paper 74301, University Library of Munich, Germany.
    10. Shabbir, Safia, 2012. "Monetary Transmission in Pakistan: The Balance Sheet Channel," MPRA Paper 37862, University Library of Munich, Germany.
    11. Fayyaz Hussain & Mehak Ejaz, 2022. "Effectiveness of the Exchange Rate Channel in Monetary Policy Transmission in Pakistan (Article)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 61(1), pages 45-67.

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    More about this item

    Keywords

    Outputgap; Inflation; Vector Error Correction;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology

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