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A structural VAR (SVAR) approach to cost channel of monetary policy

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  • Faiz ur, rehman
  • Wasim, shahid malik

Abstract

The study aims at investigating, whether or not the cost channel of monetary policy is effective in Pakistan. The cost channel is one of the theoretical justifications of Price Puzzle, a phenomenon that has been observed in a number of empirical studies. Using Structural Vector Autoregression (SVAR) and data from different industries of manufacturing sector of Pakistan over the period 2001:M07-2008:M04, we find strong evidence in favor of Price Puzzle in major industries. In industries like textile, food and beverages, pharmaceuticals, automobiles, and fertilizers, cost channel dominates the traditional demand channel. Same behavior is observed for aggregate price level in the overall manufacturing sector. The main reason for the result is the dependency of the above mentioned industries on short-term borrowing to finance their operational liquidity.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32349.

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Date of creation: 31 Dec 2010
Date of revision: 09 Feb 2011
Handle: RePEc:pra:mprapa:32349

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Keywords: Cost Channel; Price Puzzle; Working Capital; Monetary Policy; Marginal Cost; Structural Vector Autoregression (SVAR);

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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky Price and Limited Participation Models of Money: A Comparison," NBER Working Papers 5804, National Bureau of Economic Research, Inc.
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Cited by:
  1. Muhammad Nasir & Qasim Jan & Muhammad Javid, 2011. "Cointegrated money in production function: evidence from a developing country," Economics Bulletin, AccessEcon, vol. 31(4), pages 2996-3005.

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