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Measuring the effects of monetary policy in Pakistan: A factor augmented vector autoregressive approach

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  • Munir, Kashif
  • Qayyum, Abdul

Abstract

This paper examines the effects of monetary policy in Pakistan economy using a data rich environment. We used the Factor Augmented Vector Autoregressive (FAVAR) methodology, which contains 115 monthly variables for the period 1992:01 to 2010:12. We compare the results of VAR and FAVAR model and the results showed that FAVAR model explains the effects of monetary policy which are consistent with theory and better than VAR model. VAR model shows the existence of price puzzle and liquidity puzzle in Pakistan while FAVAR model did not provide any evidence of puzzles. FAVAR model supports the effectiveness of interest rate channel in Pakistan.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35976.

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Date of creation: 16 Jan 2012
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Handle: RePEc:pra:mprapa:35976

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Keywords: Monetary Policy; VAR; FAVAR;

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  1. Muhammad Javid & Kashif Munir, 2010. "The Price Puzzle and Monetary Policy Transmission Mechanism in Pakistan: Structural Vector Autoregressive Approach," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(4), pages 449–460.
  2. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  3. Faust, Jon & Rogers, John H. & Swanson, Eric & Wright, Jonathan H., 2002. "Identifying the effects of monetary policy shocks on exchange rates using high frequency data," Working Paper Series 0167, European Central Bank.
  4. Bagliano, Fabio-Cesare & Favero, Carlo A, 1997. "Measuring Monetary Policy with VAR Models: An Evaluation," CEPR Discussion Papers 1743, C.E.P.R. Discussion Papers.
  5. Masahiko Shibamoto, 2007. "An Analysis Of Monetary Policy Shocks In Japan: A Factor Augmented Vector Autoregressive Approach," The Japanese Economic Review, Japanese Economic Association, vol. 58(4), pages 484-503.
  6. Miyao, Ryuzo, 2002. "The Effects of Monetary Policy in Japan," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 376-92, May.
  7. Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
  8. Peersman, Gert & Smets, Frank, 2001. "The monetary transmission mechanism in the euro area: more evidence from VAR analysis," Working Paper Series 0091, European Central Bank.
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