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The Contemporaneous Correlation of Structural Shocks and Inflation-Output Variability in Pakistan

Author

Listed:
  • Muhammad Nasir

    (Pakistan Institute of Development Economics, Islamabad)

  • Wasim Shahid Malik

    (Department of Economics, Quaid-i-Azam University, Islamabad)

Abstract

Monetary policy has changed in a number of ways in the last two decades. Along with other characteristics, modern monetary policy is forward-looking and today central banks, to maintain credibility, respond contemporaneously to structural shocks that might make inflation deviate from the target in future. This study aims at investigating this aspect of monetary policy for Pakistan. Using the modified version of Structural Vector Autoregression (SVAR) developed by Enders and Hurn (2007), the authors have found a weak policy response to supply side shocks as the correlation coefficient between demand and supply shocks is only 0.041. Moreover, the results show that the demand shocks have no significant contribution in output variability. On the other hand, both demand and supply shocks, along with foreign supply shocks, significantly contribute to inflation variability.

Suggested Citation

  • Muhammad Nasir & Wasim Shahid Malik, 2011. "The Contemporaneous Correlation of Structural Shocks and Inflation-Output Variability in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 50(2), pages 145-162.
  • Handle: RePEc:pid:journl:v:50:y:2011:i:2:p:145-162
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    File URL: http://www.pide.org.pk/pdf/PDR/2011/Volume2/145-162.pdf
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    Cited by:

    1. Rehana Siddiqui & Hafiz Hanzla Jalil & Muhammad Nasir & Wasim Shahid Malik & Mahmood Khalid, 2008. "The Cost of Unserved Energy: Evidence from Selected Industrial Cities of Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 47(3), pages 227-246.
    2. Inayat Ullah Mangla, 2011. "Reconstructing the Performance of Pakistan’s Political Economy: Another Paradigm," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 30-70, September.

    More about this item

    Keywords

    Monetary Policy; Contemporaneous Correlation; Pakistan; Structural Shocks; Vector Autoregression;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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