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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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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. Fabio C. Bagliano & Carlo A. Favero, . "Measuring Monetary Policy with VAR Models: an Evaluation," Working Papers, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University 132, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, Elsevier, vol. 36(5), pages 975-1000, June.
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  4. Alain Kabundi & Nonhlanhla Ngwenya, 2011. "Assessing Monetary Policy In South Africa In A Data‐Rich Environment," South African Journal of Economics, Economic Society of South Africa, Economic Society of South Africa, vol. 79(1), pages 91-107, 03.
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  12. 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.
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  15. Masahiko Shibamoto, 2007. "An Analysis Of Monetary Policy Shocks In Japan: A Factor Augmented Vector Autoregressive Approach," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 58(4), pages 484-503.
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