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The Contemporaneous Correlation of Structural Shocks and Inflation— Output Variability in Pakistan

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Author Info

  • Muhammad Nasir

    (Pakistan Institute of Development Economics, Islamabad.)

  • Wasim Shahid Malik

    (Quaid-i-Azam University, Islamabad.)

Abstract

Monetary policy has changed in a number of ways during the last two decades . Along with the other characteristics, modern monetary policy is forward-looking, and the central banks respond contemporaneously to structural shocks that are expected to make inflation deviate from the future targets. This study aims at investigating this aspect of the monetary policy for Pakistan. Using a modified version of Structural Vector Autoregression (SVAR) developed by Enders and Hurn (2007), we have found a weak response of policy to supply-side shocks as the correlation coefficient between the demand and supply shocks is only 0.041. Moreover, the results show that the demand shocks have no significant contribution to output variability. On the other hand, both the demand and supply shocks, along with the foreign supply shocks, significantly contribute to inflation variability.

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File URL: http://www.pide.org.pk/pdf/Working%20Paper/WorkingPaper-70.pdf
File Function: First Version, 2011
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Bibliographic Info

Paper provided by Pakistan Institute of Development Economics in its series PIDE-Working Papers with number 2011:70.

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Length: 20 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:pid:wpaper:2011:70

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Related research

Keywords: Monetary Policy; Contemporaneous Correlation; Pakistan; Structural Shocks; Vector Autoregression;

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Cited by:
  1. Rehana Siddiqui & Hafiz Hanzla Jalil & Muhammad Nasir & Wasim Shahid Malik & Mahmood Khalid, 2011. "The Cost of Unserved Energy: Evidence from Selected Industrial Cities of Pakistan," PIDE-Working Papers 2011:75, Pakistan Institute of Development Economics.
  2. Inayat Ullah Mangla, 2011. "Reconstructing the Performance of Pakistan’s Political Economy: Another Paradigm," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 30-70, September.

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