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The price puzzle and monetary policy transmission mechanism in Pakistan: Structural vector autoregressive approach

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  • Javid, Muhammad
  • Munir, Kashif

Abstract

This paper address the issue of monetary policy effectiveness and the price puzzle, a positive response of prices to monetary tightening, in Pakistan. Study examines the effects of monetary policy shock on 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 period reviewed associated with persistent depreciation of domestic currency value relative to the U.S. dollar.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 30670.

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Date of creation: 2011
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Handle: RePEc:pra:mprapa:30670

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Keywords: Monetary policy; Price puzzle; Structural VAR; Pakistan;

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References

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  1. Saqib, Omar F & Omer, Muhamad, 2008. "Monetary Targeting in Pakistan: A Skeptical Note," MPRA Paper 14883, University Library of Munich, Germany.
  2. Castelnuovo, Efrem & Surico, Paolo, 2009. "Monetary policy, inflation expectations and the price puzzle," Research Discussion Papers, Bank of Finland 30/2009, Bank of Finland.
  3. Sims, Christopher A. & Zha, Tao, 2006. "Does Monetary Policy Generate Recessions?," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 10(02), pages 231-272, April.
  4. Giordani, Paolo, 2000. "An alternative explanation of the price puzzle," Working Paper Series in Economics and Finance 414, Stockholm School of Economics, revised 06 Dec 2000.
  5. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(7), pages 1385-1413, October.
  6. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 45(3), pages 561-586, June.
  7. Qayyum, Abdul, 2008. "Does Monetary Policy Play Effective Role in Controlling Inflation in Pakistan," MPRA Paper 13080, University Library of Munich, Germany.
  8. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1011, Cowles Foundation for Research in Economics, Yale University.
  9. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
  10. 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, Elsevier, vol. 48(2), pages 387-412, August.
  11. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
  12. Krusec, Dejan, 2010. "The "price puzzle" in the monetary transmission VARs with long-run restrictions," Economics Letters, Elsevier, Elsevier, vol. 106(3), pages 147-150, March.
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Cited by:
  1. 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, Department of Economics, The Lahore School of Economics, vol. 18(1), pages 39-62, Jan-June.
  2. 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.

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