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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.

Suggested Citation

  • Javid, Muhammad & Munir, Kashif, 2011. "The price puzzle and monetary policy transmission mechanism in Pakistan: Structural vector autoregressive approach," MPRA Paper 30670, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:30670
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Muhammad Arshad Khan & Ayaz Ahmed, 2011. "Macroeconomic Effects of Global Food and Oil Price Shocks to the Pakistan Economy: A Structural Vector Autoregressive (SVAR) Analysis," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 50(4), pages 491-511.
    2. Zafar Hayat & Muhammad Nadim Hanif, 2020. "Assessing the Role of Money versus Interest Rate in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 59(1), pages 101-114.
    3. 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.
    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. Farhan AHMED & Muhammad OWAIS & Sandhya KUMARI & Rohit RAJJANI, 2018. "Exchange rate pass-through to macroeconomic indicators using Vector Auto Regression: Empirical evidence from Pakistan," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(616), A), pages 61-76, Autumn.
    6. Shahid, Muhammad & Qayyum, Abdul & Shahid, Waseem, 2016. "Fiscal and Monetary Policy Interactions in Pakistan Using a Dynamic Stochastic General Equilibrium Framework," MPRA Paper 72595, University Library of Munich, Germany.
    7. Gulzar Khan & Ather Maqsood Ahmed, 2020. "Understanding Business Cycle Fluctuations in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 59(1), pages 1-28.
    8. 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.
    9. Roseline Nyakerario Misati & Esman Morekwa Nyamongo & Isaac Mwangi, 2013. "Commodity price shocks and inflation in a net oil-importing economy," OPEC Energy Review, Organization of the Petroleum Exporting Countries, vol. 37(2), pages 125-148, June.
    10. 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.
    11. Shahzad Ahmad & Adnan Haider, 2019. "An evaluation of the forecast performance of DSGE and VAR Models: The case of a developing country," Business Review, School of Economics and Social Sciences, IBA Karachi, vol. 14(1), pages 28-52, January-J.

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    More about this item

    Keywords

    Monetary policy; Price puzzle; Structural VAR; Pakistan;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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