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Are the effects of monetary policy on output asymmetric in Pakistan?

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  • Zakir, Nadia
  • Malik, Wasim Shahid

Abstract

This research mainly investigates whether the response of output to monetary policy actions is symmetric or not. We test all the three main forms of asymmetries in the impact of monetary policy discussed in the literature so far. Also, we make some hybrid cases to go further in the detail of the tested asymmetries. While mainly following the methodology given by Cover (1992), we make some necessary variations to the procedure. We find evidence in the favor of asymmetry in the effects of monetary policy actions on output. Our results indicate that monetary policy actions seem ineffective in periods of high growth while having strong effects on output during low growth periods. Further, output responds strongly to tight monetary policy actions when the economy is in low growth phase. We also find some support for the argument that negative money supply changes affect output whereas positive changes do not. The findings also suggest that output responds only to small monetary policy shocks and big shocks do not significantly explain the variations in the transitory component of output. The results of hybrid case give further insight that output strongly responds to small negative monetary policy shocks. Wald test rejects the hypothesis of symmetry in the favor of asymmetry in the response of output to monetary policy actions in all the cases.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 1-9

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Handle: RePEc:eee:ecmode:v:32:y:2013:i:c:p:1-9
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

Keywords: Monetary policy; Asymmetry; Pakistan;

Find related papers by JEL classification:

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

References listed on IDEAS
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  1. Thoma, Mark A., 1994. "Subsample instability and asymmetries in money-income causality," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 279-306.
  2. Garcia, R. & Schaller, H., 1995. "Are the Effects of Monetary Policy Asymmetric?," Cahiers de recherche 9505, Universite de Montreal, Departement de sciences economiques.
  3. Sajawal Khan & Idrees Khawaja, 2011. "Predation, Institutional Quality and Economic Growth," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 50(4), pages 809-820.
  4. Barro, Robert J, 1977. "Unanticipated Money Growth and Unemployment in the United States," American Economic Review, American Economic Association, vol. 67(2), pages 101-15, March.
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  7. Shen, Chung-Hua, 2000. "Are the Effects of Monetary Policy Asymmetric? The Case of Taiwan," Journal of Policy Modeling, Elsevier, vol. 22(2), pages 197-218, March.
  8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
  9. Karras, Georgios, 1996. "Are the Output Effects of Monetary Policy Asymmetric? Evidence from a Sample of European Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(2), pages 267-78, May.
  10. Weise, Charles L, 1999. "The Asymmetric Effects of Monetary Policy: A Nonlinear Vector Autoregression Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 85-108, February.
  11. Karras, Georgios, 1996. "Why are the effects of money-supply shocks asymmetric? Convex aggregate supply or "pushing on a string"?," Journal of Macroeconomics, Elsevier, vol. 18(4), pages 605-619.
  12. repec:fth:harver:1418 is not listed on IDEAS
  13. Lo, Ming Chien & Piger, Jeremy, 2005. "Is the Response of Output to Monetary Policy Asymmetric? Evidence from a Regime-Switching Coefficients Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 865-86, October.
  14. Frederic S. Mishkin, 1980. "Does Anticipated Monetary Policy Matter? An Econometric Investigation," NBER Working Papers 0506, National Bureau of Economic Research, Inc.
  15. Morten Ravn & Martin Sola, 1996. "A Reconsideration of the Empirical Evidence on the Asymmetric Effects of Money-supply shocks: Positive vs. Negative or Big vs. Small," Archive Discussion Papers 9606, Birkbeck, Department of Economics, Mathematics & Statistics.
  16. Cover, James Peery, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1261-82, November.
  17. Wasim Shahid Malik, 2007. "Monetary Policy Objectives in Pakistan: An Empirical Investigation," PIDE-Working Papers 2007:35, Pakistan Institute of Development Economics.
  18. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
  19. Frydman, Roman & Rappoport, Peter, 1987. "Is the Distinction between Anticipated and Unanticipated Money Growth Relevant in Explaining Aggregate Output?," American Economic Review, American Economic Association, vol. 77(4), pages 693-703, September.
  20. J. Bradford DeLong & Lawrence H. Summers, 1988. "How Does Macroeconomic Policy Affect Output?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 433-494.
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