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The State of Pakistan’s Economy and the Ineffectiveness of Monetary Policy

Author

Listed:
  • Abdullah, Muhammad
  • Gul, Zarro
  • Waseem, Faiza
  • Islam, Tanweer

Abstract

Purpose: Higher interest rate policy by the State Bank of Pakistan (SBP) has not only been failed to control inflation in Pakistan but adversely impacted public and private investment. High cost of doing business retarded economic growth as well. Therefore, the aim of this study is to inspects the ineffectiveness of monetary policy measures in Pakistan and suggest possible actions to improve effectiveness of the monetary policy. Method: This study utilizes the monthly data from 2007(4)-2019(8) to compute the variance decomposition and impulse responses using VAR modelling. Findings: The impulse response analysis from the VAR model clearly highlights the ineffectiveness of interest rate channel in trying to control inflation in Pakistan. The empirical results indicate that both domestic food price and exchange rate channels are effective means of managing price levels in the country. It is, therefore, recommended that Pakistan should switch from demand side to supply-side policies when forming strategies to control economic vices like inflation.

Suggested Citation

  • Abdullah, Muhammad & Gul, Zarro & Waseem, Faiza & Islam, Tanweer, 2021. "The State of Pakistan’s Economy and the Ineffectiveness of Monetary Policy," MPRA Paper 112678, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:112678
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation; Impulse response functions; Variance decomposition;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • 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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